Types of Bonds

 

Bonds can be called by different names, which usually refer to their time to maturity. For bonds that mature at a period of less than 12 months, these bonds will be called bills. Notes are bonds that have a maturity date between 12 months and 10 years. And bonds are a type of bond that has a maturity date in excess of 10 years. All three of these different names refer to the securities known as bonds.

 

 

There are several basic types of bonds, and the types generally relate to the issuing entity. While there can be a great number of different types of bonds, the four main types are United States governmentally-issued bonds, corporate bonds, municipal bonds, and mortgage-backed bonds. Within these four categories there are also many subcategories that generally relate to risk and how interest and repayment of principle is handled.

 

 

U.S. government bonds are always issued by the same entity, the U.S. Treasury Department. Often called "t-bills" for this reason, purchasers of government bonds are in essence lending the government money. For the length of time that the bond is held, the government must then pay scheduled interest payments to the lender, or "bondholder", and at the maturity date of the bond, must also repay the principal or original face value amount of the bond. In addition to the commonly known t-bill, other types of U.S. government bonds can include the Treasury note, the Treasury bond, the zero-coupon or accrual bond, or the U.S. savings bond. The main variances between these different sub-types of U.S. government bonds comes in the date to maturity, how interest payments are handled, whether interest rates are fixed or variable across the bond lifespan, and how interest payments are handled at the state or local level.

 

 

Corporate bonds are issued not by the federal government, but by private entities in an effort to raise funds for their corporate initiatives. They are generally considered to be riskier than U.S. government bonds, and for this reason they also generally tend to offer higher interest payments to bondholders. Prospective bondholders often find it helpful to consult independent ratings agencies such as Moody's or Standard & Poor's to determine the relative risk-to-return ratio for a bond they are considering. Bond ratings can range from AAA, or highest quality, all the way to D, extremely high risk. In addition, because of the nature of corporate bonds, there tends to be a high minimum to even get into the game, and corporate bonds often come with a face value of $5,000 or greater and are subject to all applicable taxes for principal and interest payments.

 

 

Municipal bonds are issued by state and local governmental entities to fund their initiatives. Often simply called "munis" by financial professionals, municipal bonds have a lower risk than corporate bonds and are categorized as "public purpose bonds", which means that, for the most part, they are exempt from taxation, although capital gains may not be depending on how the bond has been purchased and handled. Interest yields may be lower to reflect advantages that come from tax-reduced or tax-free status, but this too can vary by the issuing entity and bond class.

 

 

Mortgage-backed bonds generally come from two entities, the GNMA, often called "Ginnie Mae" or the Government National Mortgage Association, or the FHLMC, "Freddie Mac", or the Federal Home Loan Mortgage Corporation. Both entities are managed by the government and offer bonds to fund pooled or purchased mortgage debt. Ginnie Mae bonds are fully backed by the U.S. government, while Freddie Mac bonds are not.