Introduction to Bond Types
Bonds are debt instruments issued by vaious entities in order to raise capital for current needs. Bonds are repaid in full at the end of their term, known as maturity. Most bonds also pay periodic interest payments as well.
The short easy way to understand bonds is to consider them formal IOUs.
Types of Bonds
There are three basic types of bonds, corporate bonds, government bonds, and municipal bonds.
Corporate bonds are issued by corporations and other non-governement entities. These bonds are repaid by the company. If the company defaults on its bonds, usually through bankruptcy, the investor may not be repaid. This risk is known as default risk and is one of the primary concerns of bond investors.
Government bonds are bonds issued by the United States Government. These bonds are backed by the full faith and credit of the United States Government and are considered to be risk free from any sort of default. For this reason, they pay less interest than Corporate bonds.
Municipal bonds are bonds issued by local governments, municipalities, and other non-federal government entities such as state, cities, and other divisions from there. Municipal bonds can vary greatly in their risk depending upon who is issuing the bond and from what funds the bonds will be paid back. Municipal bonds are usually called, Munis, or Muni Bonds. The interest they pay is not subject to Federal Income Taxes. Many states also exempt their own muni bonds from state taxes as well, making the interest on many munis tax-free.