Question

I would categorize bond into three general categories: Corporate Bond, Federal Government Bond , and Municipal Bond, please explain the difference.

Answer 1

Before going into details, let me explain what is a bond.
Bond is a debt instrument, which is used to raise the capital or money. It is like loan only, where the issuer (corporation, government etc..) pays the coupon rate or bond rate to the lender in regular intervals till the maturity period.

Corporate bonds are issued by the large corporations for raising the capital. These are generally long-term instruments. The corporate bonds are riskier compared to the government bonds, they fetch higher rates of return compared to the government bonds. The corporate bonds which have the maturity period of less than one year are called commercial papers. Corporate bonds are generally issued at par value and the bondholder gets coupon payments till the maturity period.

Federal government bonds are issued by the government. Central bank coordinates the issuance of the government bonds. These are less riskier compared to the corporate bonds because these bonds are backed by the government. They fetch lower returns than the corporate bonds. There are different types of instruments in government bonds, for instance, in the US, the types are treasury bills, treasury notes, treasury bonds, and Treasury inflation-protected securities that vary in their maturity period and coupon payments.

A municipal bond is also a debt security, issued by the municipality, state, or local government mainly to finance its capital expenditures like the construction of schools, highways, bridges etc. These bonds are exempt from most of the taxes, making them more attractive.