Question

What are the different types of bonds and what are key characteristics of each?

Answer 1

The first characteristic of a bond is its face, or par value. This represents the amount of principal that a bondholder will receive at maturity, and is also the value that that a bond is issued for at the time that a company or government first sells them.

There are at least five different types of bonds. They each have different sellers, purposes, buyers, and levels of risk versus return.

1. U.S. Treasury Bonds
2. Savings Bonds
3. Agency Bonds
4. Municipal Bonds
5. Corporate Bonds

1. US Treasury Bonds:- The most important bonds are the U.S. Treasury bills, notes, and bonds issued by the Treasury Department. They are used to set the rates for all other long-term, fixed-rate bonds. The Treasury sells them at auction to fund the operations of the federal government. They are also resold on the secondary market. They are the safest since they are guaranteed by the world's largest economy. That means they also offer the lowest return. They are owned by almost every institutional investor, corporation, and sovereign wealth fund. The Treasury also sells Treasury Inflation Protected Securities that protect against inflation.
2. Savings Bonds:- Savings bonds are also issued by the Treasury Department. These are meant to be purchased by individual investors. That's why they are issued in low enough amounts to make them affordable for individuals. I bonds are like Savings bonds, except they are adjusted for inflation every six months.
3. Agency Bonds:- Quasi-governmental agencies, like Fannie Mae and Freddie Mac, sell bonds that are guaranteed by the federal government.
4. Municipal Bonds:- Municipal bonds are issued by various cities. These are tax-free but have slightly lower interest rates than corporate bonds. They are slightly more risky than bonds issued by the federal government. Cities occasionally do default.
5. Corporate Bonds:- Corporate bonds are issued by all different types of companies. They are riskier than government-backed bonds so they offer a higher rate of return. They are sold by the representative bank. There are three types of corporate bonds:

• Junk bonds or high yield bonds are corporate bonds from companies that have a big chance of defaulting. They offer higher interest rates to compensate for the risk.
• Preferred stocks are technically stocks but act like A-bonds. Like bond payments, they pay you a fixed dividend at regular intervals. They are slightly safer than stocks because holders get paid after bondholders but before common stockholders.
• Certificates of Deposit are like bonds issued by your bank. You essentially loan the bank your money for a certain period of time for a guaranteed fixed rate of return.