Financial Answer Center
Investment Vehicles

Bonds

If you buy a bond, you are lending money. You might be making a loan to the government, or to the town where you live, or to a multinational corporation.

Bonds pay a set amount of interest at regular intervals and are known as fixed-income investments. Because the income is predictable, they are suitable for people who need income on which they can count. They are also very popular with people who don't like the fluctuations in the stock market. Short- and intermediate-term bonds are good investments for the intermediate term, when you know that you will need the money in three to five years.

Every bond has a maturity date (when the principal is paid back) and an interest or coupon rate. The interest rate is the percentage of par value that is paid out in interest each year. Par value is the amount printed on the front, or face, of the bond, and for that reason is also known as face value.

If you buy a bond at the issue date (when it first comes out), and you hold it until maturity, you will earn precisely the interest printed on the bond and get back its par value at the end.

If, however, you buy or sell a bond on the secondary market (after it has been issued), then its value will depend on the prevailing interest rates at that time.

Bond Type

Comments

Corporate bonds

Generally more risky but higher yields than government bonds

Municipal bonds

Exempt from federal taxes; may be exempt from state and local, too.

Treasury bonds

Exempt from state and local taxes.

Treasury notes

Exempt from state and local taxes.

Treasury bills

Exempt from state and local taxes.

Series EE bonds

Exempt from state and local taxes. If used for education may be tax-free.

Series I bonds

Exempt from state and local taxes. In addition, I bonds are inflation-indexed bonds. If used for education may be tax-free.

Agency bonds

Mortgage bonds are taxable; others are exempt from state and local taxes.


Corporate and municipal bonds are rated by services such as Moody's for their credit rating. If you want to buy individual bonds, you should check their rating. Treasury notes, bills and bonds are backed by the U.S. government.

Agency bonds are issued by federal and state agencies to raise money for their operations. Federal mortgage bonds like Ginnie Mae and Fannie Mae are some of the better known of these. They have higher risks than Treasuries.

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