Types of Bonds
- Sneha
- Jul 12, 2020
- 2 min read
There are many types of bonds! I will discuss 4 of the main ones: Corporate, Agency, Municipal, and Government.
Just a Reminder
Bonds are fixed-income securities and they’re usually issued by a company or government. It’s like you’re loaning out some of your money. There’s a stated interest rate so that means there’s a stream of income. It’s not as volatile as stocks.
Corporate
This bond is issued by companies. There is some risk depending on how the company performs.
Agency
These are bonds that are issued by government organizations, but not the Treasury. These bonds are backed up like the government bonds, and investors get a fixed interest rate with regular payments. But with a fixed interest rate comes risk. This is because the market can change and inflation.
Municipal
This bond is issued by states, municipalities, or counties. These bonds are usually exempt from federal, state, and local taxes. These bonds can be issued when the municipality wants to conduct a project, like construction. You can also categorize these bonds. 2 categories are Revenue Bonds and General Obligation Bonds. The revenue bonds are issued by the municipality but the payments and interest are actually done by a third party. Basically the municipality is just issuing the bind and managing what is happening and the third party is dealing with the money. The General Obligation bonds are not backed by a municipality project. Revenue bonds are riskier than General Obligation bonds. Overall, Municipal bonds are less risky than corporate bonds.
Government
These bonds are issued by the government or Treasury. This can be called sovereign debt. There are fixed interest and regular payments. This is called coupon payments. If the interest rate is fixed, it can be risky depending on inflation and market movements. There are some Treasury Inflation Protected Securities which increase with inflation and decrease with deflation. There many more specific types of government bonds but the specifics depend on the country.
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