Guide to the Different Kinds of US Bonds Available Today

By admin, September 11, 2013

Borrowing money is something that’s hard to avoid, both for individuals and large organizations. Even if you have an ample budget, some investments require more. In a large scale, the government and companies issue bonds to aid in borrowing large sums of money. They receive these funds by issuing bonds, which investors purchase. Most bonds have a maturity date, which is when the issuer must pay the investors back. When this occurs, the investor is awarded additional compensation on top of whatever their initial investment was.

The concept of bonds is fairly straightforward, but identifying the different kinds of bonds available today in the US can be daunting to someone with little bond and investment experience. Yet it’s certainly something to look into, with two primary advantages: purchasing bonds can strengthen one’s financial portfolio, and help them stay knowledgeable about market trends. Substantial income can be earned through investing in the right bonds. In general, the types of bonds are grouped by the type of organization or individual that issues them. There are four primary types of bonds that one can purchase in the US:

Municipal bonds are issued by local government, often to provide funding for local projects like improving school districts, sewage systems, publicly owned airports, and rehabilitation centers. Any capital gain from a municipal bond is taxable, and may be counted as income if sold at a profit prior to maturity. Still, many municipal bonds are exempt from interest via state and/or federal income tax, though this tax advantage does result in lower interest rates.

Your tax bracket is important to keep in mind when deciding to purchase municipal bonds. Use the Taxable Equivalent Yield – which is Tax-exempt yield divided by (1 – your marginal tax rate) – to help identify the yield on a taxable municipal bond. There are tools that calculate Taxable Equivalent Yield, as well. In general, tax-free municipal bonds are not useful for low income brackets, as the taxes they are saving may not compensate for the lower interest rates.

Corporate bonds are issued by corporations in order to expand their business. Its maturity date is often after a year from its issue date, with the occasional “commercial paper” corporate bonds having a shorter maturity span. Standard & Poor’s, Moody’s, and other rating services provide an estimate on whether a corporate bond issuer will be able to meet scheduled payments, with the ‘AAA’ rating having the lowest risk and ‘D’ having the highest risk. Using these ratings can help investors avoid high-risk investments.

Mortgage Backed Securities is a security that involves mortgages, often many mortgages. The multitude of mortgages involved makes it perhaps the most high-risk form of bond investment, but it can also result in some of the highest yields. This is how it works: mortgages are sold to either an investment bank or government agent that combines these loans into a tidy security, which investors can purchase. Unlike other bonds, which have a maturity date, mortgage-backed securities are paid off periodically.Ginnie Mae and Freddie Mac are the most common entities that issue mortgage-backed securities.

U.S. Government Securities present some of the most diverse types of bonds. They are issued by the US Department of Treasury, and exist in periodic additional payments to the bondholder, in addition to the principal amount being reimbursed at the maturity date. The government is the largest issuer of debt securities, and as a result these are considered some of the safest fixed-income investment opportunities. Different types of U.S. government securities include a T-Bill, U.S. Treasury Note, U.S. Treasury Bond, Savings bonds, and zero-coupon bond, the latter of which pays no interest but is issued at a discount that depends on the maturity length. You can purchase U.S. government securities directly though the US Department of Treasury.