Bonds

Bonds, also known as interest-bearing bonds or finance bonds, can be categorized as an IOU: a debt instrument of a corporation or entity that promises to pay a specified rate of interest for a specified period of time, including principal to be paid when the bond matures.

Because the interest rate and time are specified or fixed bonds are known as ‘fixed-income’ securities. No matter who holds the bond or what might transpire during the fixed time period, the same amount of money will be generated that was agreed upon at the time of the bond sale. The face value will remain the same. Typically, bonds are sold to the public in face value increments of $1,000 although some types of bonds, such as savings bonds, are offered in smaller face values.

Because of a bond’s fixed-income status there is less risk and also lower returns than other investments, such as stocks. The risk is also lowered due to the fact that bonds must be paid before funds are made available to stockholders.

Types of Bonds

Although there are numerous types of bonds the following categories are much common.

• Treasury Securities—These are bonds issued by the U.S. government-called Treasury Bonds or Treasuries because they are sold by the Treasury Department. Because they are guaranteed by the U.S. government they are the safest bond you can own.
• Municipal Bonds—Also referred to as Munis; municipal bonds are issued by state and local governments. Also known as tax-free bonds because the federal government doesn’t require investors to pay federal income tax on the interest paid. State and local governments also often waive state and local income taxes on these bonds.
• Corporate Bonds—Corporate bonds are issued by companies to finance their operations and expansions and normally carry higher interest rates than Treasury Bonds. This is in direct relation to the higher risk that the company could default (not pay) its bond.

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