What Are Some of the Common Bonds Available to Investors?
It is not a difficult task for investors to buy bonds from the three major bond categories of government, municipal and corporate bonds. Some bonds can be purchased on your own or through a discount stock broker. With other types of bonds, a "live" investment broker who understands bonds can help you separate the bonds appropriate for your situation from the bonds that would not be a good fit in your portfolio.
The federal government borrows money through the issue of different types of bonds. The U.S. Treasury issues debt securities ranging from 13-week Treasury bills to 30-year Treasury bonds. Some government agencies, such as the Government National Mortgage Association -- Ginnie Mae -- and Small Business Administration -- SBA -- also issue or guarantee bonds. The Treasury securities secondary market is the largest and most liquid bond market in the world. Investors can buy Treasuries through a discount brokerage account or directly from the Treasury using the TreasuryDirect website.
Municipal bonds are issued by state and local governments. The interest paid on municipal bonds is tax-free to investors. If an investor buys municipals issued in her home state, the bond interest is double tax-free, exempt from both federal and state income tax. Individual municipal bond investing is best done by working with an investment representative who can explain the differences between various bond issues and works for a brokerage firm with an active municipal bond trading desk.
Corporate bonds are a form of borrowing used by businesses. The major distinction between different corporate issues is the credit rating of the issuing company and whether that credit rating is investment grade or non-investment grade. Investment grade corporate bonds are an alternative to government bonds for investors looking for a little more yield from a safe investment. Non-investment grade bonds are often referred to as high-yield or "junk" bonds. High-yield bonds pay significantly higher yields in exchange for a higher risk of default. Both discount and full service brokers can find and sell corporate bonds based on an investor's stated risk and return goals.
There are bond funds of every type -- mutual funds, closed-end funds, exchange traded funds and unit investment trusts. Bond funds allow investors to buy into a professionally selected and managed portfolio of bonds with a single investment. Bond funds usually pay out interest earnings in the form of monthly dividends, providing a stream of income for investors looking to use bond interest as income. Mutual funds and unit investment trusts allow investors to elect to have dividends reinvested, providing compound growth if that is the investor's goal.
Tim Plaehn has been writing financial, investment and trading articles and blogs since 2007. His work has appeared online at Seeking Alpha, Marketwatch.com and various other websites. Plaehn has a bachelor's degree in mathematics from the U.S. Air Force Academy.