Types Of Bonds
When it comes to choosing the best bonds for you, there is no better than the amazing types of bonds. Find out what type best suits you.
There are different types of bonds people can invest in. Each of it carries certain benefits as well as risks. However, compared to investing in a common stock, bonds are safer to place money on. This has been proven many times especially during bear markets, the occurrences when stocks go down.
What are Bonds?
Bonds are actually IOUs. It’s a loan given by persons or companies to the issuer of the bond. The issuer can either be the government or other companies in need of money to push through with their projects such as infrastructures or for opening a new business branch.
In return for lending their money, bond investors (those who bought the bonds) get a coupon which is the bond’s annual rate of interest. This interest is paid twice a year until it reaches maturity. While some bonds don’t actually pay the interest, repaying the principal or the money lent is required.
The Different Types of Bonds
A bond may not give a larger return of investment compared to common stock (where a person is given rights to a company’s assets and earnings) especially during bull markets, the time when stocks are increasing in value much faster. However during bear markets, the bond’s value is greatly realized as investors still get their money back even if stocks are low.
There are four types of bonds available: government, municipal, corporate, and zero. Each of these types has its own subtypes people can choose from. For those who plan to start investing in bonds or are even new to investing, it is important to first know these types especially the risks involved in purchasing.
• A Government Bond is issued by the national government. This is also called as risk-free bonds since the government can make a way to ensure its payment once it reaches its maturity (the time when investors get to be paid back their principal investment). Unlike Eurobonds (international bonds), the government bond is offered at a currency being used by the country where it is issued.
In the United States, their government bond is known as Treasuries since these are released by the Treasury Department. It has three types: Treasury Notes, Treasury Bills (or T-bills), and Treasury bonds. Treasuries have a maturity date from three months to thirty years.
How a government bond is issued differs in every country. While the return may be great, investors are still warned about the possibility of their money not being paid back by the government. This is more likely to occur in developing countries.
• Municipal Bonds are issued by the local government. The interest placed in these bonds is higher compared to those released by the federal government since states can go bankrupt. The best thing about these bonds however is that they are free from taxes, including the interest they pay to the bondholder.
• Corporate Bonds are released by companies. These are actually debts sold by companies. They are issued with higher interest rates but are riskier especially when a company goes bankrupt. However these are also the most rewarding since their returns are high. Convertible bonds are a type of corporate bond which can be converted to common stock. A callable bond on the other hand gives the issuer the right to pay back what it owes the investor before the bond reaches its maturity. Riskier companies issue a junk bond which is offered with higher rates to compensate the investor for the risk they get from purchasing it.
• Zero coupon bonds are non-interest bonds. Among all the different types of bonds these do not have coupons to offer the investor. However this bond can be purchased at a lower price (discounted price) compared to the amount its holder will be receiving when it matures.
It is highly recommended by financial experts for investors to purchase bonds even if they already have stocks. Whether it is government bonds, municipal bonds, corporate bonds or zero bonds, a bond is considered as a good way to safeguard financial interest especially when stocks are down (which leaves stockholders with decreased earnings). However, as mentioned earlier, understanding the different types of bonds are a must to help you in choosing which type to invest in.