Individual Bonds

The followings are some of the typical types of bonds.

Corporate Bonds

Companies issue bonds in order to raise funds for expenses, such as building new facilities or purchasing new equipment. These bonds are backed by the ability of the company to pay back its debt obligations. Since corporate bonds often have a higher credit risk than government bonds, interest rates are oftentimes higher as a result. Corporate bonds may also come with a call provision, which allows for the issuing company to redeem/call its bonds at a specified price before its scheduled maturity.

Corporate bonds can be either secured or unsecured debt obligations of the issuing company. Most issues are unsecured, meaning that they are backed only by the full faith and credit of the issuing company. However, if it is a secured bond, it is backed by a pledge of either assets or revenue. In the case of default, any collateral can be used to pay back bondholders. As a result, secured bonds typically have a lower coupon rate and credit risk compared to unsecured bonds issued by the same issuer.

Agency Bonds

Agency bonds are debt obligations issued by either a government-sponsored enterprise (GSE) or a government-owned corporation. GSEs agency bonds are issued by agencies such as the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac). Meanwhile, a government agency bond would include entities such as the Small Business Administration (SBA) and the Government National Mortgage Association (Ginnie Mae). Similar to Treasury securities, federal government agency bonds are backed by the full faith and credit of the U.S. government. Unlike a government agency bond, the federal government is under no legal obligation to save a GSE from default and GSE bonds will therefore be subject to both credit and default risk. Compared to Treasury securities, agency bonds typically offer a higher yield while having the benefit of a high credit quality, relatively good liquidity, and possible tax advantages.

Mortgage-Backed Bonds

Also known by its acronym MBS, mortgage-backed bonds are secured by mortgages or some other such real estate loan. A mortgage-backed bond can be created by pooling a number of these mortgages together. Because they are backed by an underlying pool of mortgages, mortgage-backed bonds typically have a higher credit rating when compared to other bond types like that of a corporate bond. Bondholders receive a monthly interest and principal payment supported by the underlying mortgages.

The three main types of mortgage-backed bonds are each guaranteed by one of the three government-sponsored enterprises (GSEs). These three agencies being the, Government National Mortgage Association (Ginnie Mae), Federal National Mortgage Association (Fannie Mae), and the Federal Home Loan Mortgage Corporation (Freddie Mac). Fannie Mae and Freddie Mac are agencies that purchase mortgages from lenders and packages them into bonds in order to resell them to investors. Meanwhile, Ginnie Mae does not purchase, package or sell mortgages, but rather is responsible for guaranteeing the payment of interest and principal on mortgage-backed securities (MBS). Unlike the previous two agencies, bonds backed by Ginnie Mae are guaranteed by the full faith and credit of the U.S. Government and therefore carry the same implied rating as U.S. Securities.

Municipal Bonds

Municipal bonds are a debt security issued by a state, a municipality, or other local taxing subdivision in order to raise funds for its capital expenses such as the construction of a public works project. Typically, municipal bonds pay interest that is exempt from federal income taxes. Occasionally, its interest may also be exempt from state income taxes in cases where the issuer exists in your home state. As a result, investing in municipal bonds can be a good option for investors who are looking to reduce federal and possibly even state income taxes.

The two major types of municipal bonds are general obligation (GO) and revenue bonds. A GO bond is backed by the taxing power of a state or local government. Meanwhile, a revenue bond is payable from a specific income-producing public project, such as water services or a hospital.

Treasury Securities

Treasuries are issued by the U.S. Department of the Treasury and are backed by the full faith and credit of the U.S government. As a result, treasuries are often considered to be one of the safest forms of investments for protecting capital while providing for a steady stream of income. Typically, interest payments are exempt from state income taxes and offer investors a range of maturity dates to choose from. There is also a fairly large and active secondary market, which provides for liquidity when selling your Treasuries before its maturity dat

Types of Treasury Securities

Treasury Notes (T-Notes): T-Notes pay a semiannual fixed rate of interest until maturity and have maturity dates of 2, 3, 5, 7, or 10 years.

Treasury Bonds (T-Bonds): T-Bonds are long-term debt securities with maturity dates of more than 10 years. Similar to T-Notes, treasury bonds pay a semiannual fixed rate of interest.

Treasury Inflation-Protected Securities (TIPS): TIPS are Treasuries that mature at either a face value or an inflation-adjusted principal, whichever is the greatest. Its movements in price correspond to the Consumer Price Index (CPI). Interest is paid semiannually based on the inflation-adjusted value. TIPS are issued with maturities of 5, 10, or 30 years with maturity dates providing for a certain amount of variation when purchased through the secondary market.

Common Bond Terminology

 

Note: All investments involve potential risks, including loss of principal. Please consult with your professionals regarding your specific situation prior to making any investment decisions.