U.S. Government Bonds
U.S. government bonds are considered the most important, as they include Treasury bonds, bank bonds, and other government securities issued by the Department of the Treasury. These bonds are used to set prices for other long-term fixed-rate bonds. They are sold at auctions to fund federal government operations. These bonds are considered the safest as they are backed by the U.S. government, therefore they offer the lowest yield. They are held by almost all institutional investors, corporations, and sovereign wealth funds.
Saving Bonds
Saving bonds are also issued by the U.S. Department of the Treasury. These bonds are designed to be purchased by individual investors. They are issued in low enough amounts to make them affordable for individuals. Saving bonds resemble regular bonds, except they adjust for inflation every six months.
Agency Bonds
Quasi-governmental agencies like Fannie Mae and Freddie Mac sell bonds guaranteed by the federal government.
Municipal Bonds
Municipalities issue many bonds. Municipal bonds are tax-exempt but have slightly lower interest rates than corporate bonds. They are a bit riskier than bonds issued by the federal government. Cities may sometimes default.
Corporate Bonds
Corporations issue many types of bonds. These bonds are riskier than government-backed bonds, so they offer higher rates of return. These bonds are sold by the representing bank.
Types of Bond-Based Securities
You can benefit from bond advantages without purchasing an actual bond. You can also buy bond-based securities. These include bond mutual funds, which are collections of different types of bonds. Individual bonds differ from bond mutual funds in that individual bonds are less risky than bond mutual funds. Provided there is no default, the holder of an individual bond receives the original principal amount upon the instrument’s maturity. For bond mutual funds, investors are at risk of losing principal if prices decline.
Bond-based securities also include exchange-traded bond funds. These funds operate like mutual funds in investing, but they do not actually own the underlying bonds. Instead, exchange-traded bond funds track the performance of different categories of bonds and pay based on that performance.
Bond-based financial instruments are complex and their value depends on the underlying bonds. These instruments include options that give the buyer the right, but not the obligation, to trade a bond at a specified price on an agreed future date. The right to buy a bond is called a “call option,” and the right to sell it is called a “put option.” They are traded on a monitored exchange. Futures contracts are similar to options, except they require participants to execute the transaction. They are traded on an exchange. Futures contracts resemble forward contracts, except they are not traded on an exchange. Instead, they are traded over the counter directly between parties or through a bank. They are customized to meet the specific needs of both parties. Mortgage-backed securities rely on bundles of mortgage loans. Like bonds, they offer rates of return based on the value of the underlying assets. Debt obligations secured by debt rely on auto loans and credit card debt. They also include bundles of corporate bonds. Debt-secured securities are packages of corporate bonds with a one-year maturity. Their value is based on the value of the underlying business assets. These assets include real estate, commercial fleets, or other commercial property. Swaps allow future interest rates for bondholders to be exchanged. They are traded over the counter. Total return swaps resemble interest rate swaps, except the payments depend on bonds or a bond index or a stock index or a bundle of loans.
Questions
Frequently Asked Questions
How do bonds work?
Bonds are a loan from an investor to a company, government, municipality, or other agency. In exchange for the investment, the entity agrees to pay the investor a fixed interest rate over a specified period. Bonds come with a higher assurance of repayment compared to equity investments.
How can I buy bonds?
Depending on the type, you can buy bonds through brokers, bond mutual funds, or from the U.S. government via TreasuryDirect. You may need to have at least $1,000, which is the default amount for most bonds.
What is the coupon rate of bonds?
The coupon rate is another term for the interest rate on bonds.
Source: https://www.thebalancemoney.com/what-are-the-different-types-of-bonds-3305600
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