27 December 2009

Types of Bonds

You may be thinking about investing your money into bonds. These are viewed as being less risky than the share market, as companies or governments guarantee them. Government bonds are seen to be the most secure of all bonds, as it is more likely that a corporation could go bankrupt before the government. When you take out a bond, you are actually loaning money to that organization or government entity and they will pay back to you your initial investment plus the additional money you earn for lending them your money. Make sure that you consider what is the best investment for you situation. Treasury bonds are possibly the most common bonds you have heard about.

These are in the news a lot as the Uncle Sam is raising money to bail out the economy from the recent financial crisis. These are long term so you need to be prepared to invest your money, most likely for more than 10 years. This type of investment is viewed as one of the safest that you can make. These bonds are sometimes called T-Bonds.

Similar to treasury bonds are agency bonds. Agency bonds are issued by U.S. Government agencies. These bonds are not viewed as being as safe as treasury bonds are. Although these are backed by the U.S. Government they are not guaranteed by the U.S. Government, unlike the treasury ones which are guaranteed. Another type of these are municipal bonds. These bonds are issued by state, local or city governments to raise funds to provide services to the community. These services include roads, schools, community centers and many more. The good thing about these bonds is that are generally exempt from taxes on the interest they earn and your investment is providing worthwhile services to the community. These investments are secure, possible to the same extend that the agency ones are.

Corporate bonds are issued by private companies to raise cash. These bonds are not as safe as the government ones, so they will normally offer higher returns to make them more attractive to invest in. The zero-coupon bonds offer no interest (or coupons). You may think well why would you invest in these? The reason is that these are sold at a significant discount to what they are valued at. This means when they mature you get the value price when you sell them not what you paid for them, which can mean a huge profit to you.

The final type is very well known, it is the junk bond. This is known for giving higher returns or losing all you money, hence the name junk. This type is only those who are willing to take the high risk of losing everything, with the chance to get high returns instead.

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