Bond Investing: Municipal Bonds, Corporate Bonds, Treasury Bonds

Bond Investing 101

So what is a bond? A bond is essentially an IOU. Bonds are issued with a certain face value, also called the principal or par value. More often than not, bonds are issued with face amounts of $1,000. Every bond pays a certain interest rate or coupon rate. The coupon rate of a bond never changes. This is where the term “fixed-income security” comes from. So to explain a bond in the simplest terms, if a corporation or government issues a $1,000 bond that is paying 5%, the company or government promises to pay the bondholder $50 per year. In most cases, this interest payment is split into two payments per year, or a $25 payment twice per year. Bonds are issued with different maturity dates. Bonds issued with maturity dates of less than 5 years are called short term bonds. Bonds issued with maturity dates between 5 and 12 years are known as intermediate bonds. Finally, bonds with maturity dates greater than 12 years are known as long bonds. When the bond matures, the company or government gives the bondholder his or her $1,000 initial investment back. This is the most basic definition of how a bond works.

There are many different types of bonds available on the market today. You may have heard of treasury bonds, savings bonds, municipal bonds, corporate bonds and even convertible bonds. These are a few of the more popular types of bonds. Each type of bond has certain characteristics that we will explain.

Treasury bonds are issued by the U.S. Government and are typically considered the safest type of bond to purchase. Savings bonds are one type of Treasury bond. Savings bonds come in two types, Series I and Series EE.

Municipal bonds are issued by local or state governments for special projects or improvements to cities or states. Some examples when municipal bonds might be issued include funding projects like roads and schools.

Another type of bond is the corporate bond. This type of bond is sold by corporations so companies can fund additional business ventures. Corporate bonds carry a higher risk than treasury bonds or municipal bonds. Because of this increased risk, they often pay a higher interest rate.

Listed below are links to more information on the specific types of bonds.