How to Choose Between Different Bond Types
by: JenniferWyatt |
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Investors can buy different bond types in their portfolio. It is good having different bond types because of diversification. A portfolio should be properly allocated and diversified. Different bonds offer different risks, maturities, interest rates and terms. Bond types are usually classified according to the issuer but sometimes they are categorized based on their characteristics. A bond issuer can issue bonds of different characteristics. Examples of different bond types are given below.
Corporate bonds are the most popular type of bonds. Corporate bonds are IOUs issued by corporations to raise money for working capital. Corporations can issue different bond types with different prices, interest rates, call features, and maturity dates. Corporate bonds can be risky if the issuing corporation is in trouble. By looking at bond ratings such as those published by Moody's Investors Services or S&P, investors can see which ones are safer than others.
If safety is your primary concern, then investing in US treasury issues is the way to go. US Treasury issues are backed by the full faith and credit of the US government. There are a few different bond types issued by the US government such as T-bills, T-bonds, and T-notes. T-bills are short for Treasury bills, T-bonds for Treasury bonds and T-notes for Treasury notes. T-bills have the shortest maturity dates and are good for short term investments if yield is not the investor's primary objective.
Bonds don't have to be issued by either corporations or the federal governments, other agencies and municipalities can also issue different bond types. Agency bonds are also considered safe investments, although some may not be as safe as US Treasury issues. Some of them have the backing and guarantee of the US government while others do not. Examples of agency bonds are Fannie Mae bonds and Freddie Mac bonds.
Many investors buy bonds, not because of safety and regular income but also the tax benefits some types of bonds can offer. Municipal bonds or munis for short are bonds issued by states, local governments, counties, townships, cities, and other municipalities. Municipal bonds are issued to finance projects such as building a bridge and building a road. Different bond types are issued based on the needs of the municipal issuer.
While most of the different bond types are classified according to the type of issuer that issue them, there are different bond types that are classified based on their characteristics. A zero coupon bond, for example, can be issued by many different types of issuer but the bonds always pay no interests unlike other bond types that pay regular interests and the principal at the end. When building your bond portfolio, you need to include many different bond types, of different characteristics, not simply just bonds issued by different types of issuers.
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For more resources on the Different Bond Types and each of their individual benefits and drawbacks, stop by the Corporate Bonds information website today.
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