Different types of bonds
Investing in bonds is very safe and the returns are usually very good. There are four basic types of bonds available that are sold through governments, corporations, state and local governments, and foreign governments.
The greatest thing about bonds is that you get your initial investment back.
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| reinvest it into another bond |
This makes bonds the perfect investment vehicle for those who are new to investing or have a low risk tolerance.
The United States government sells Treasury bonds through the Treasury Department. You can buy Treasury bonds with maturities ranging from three months to thirty years.
Treasury bonds include T-notes, T-bills, and Treasury bonds. All Treasury bonds are backed by the U.S. government, and only the interest earned by the bonds is taxed.
Corporate bonds are sold through the public securities market. A corporate bond is essentially a company selling its debt. Corporate bonds usually have high interest rates, but they are somewhat risky. If the company fails, the bond is worthless.
State and local governments also sell bonds. Unlike bonds issued by the federal government, these bonds typically have higher interest rates. This is because state and local governments can actually be more insolvent than the federal government.
State and local bonds are exempt from income tax even on interest. State and local taxes may be waived. Tax-exempt municipal bonds are common state and local bonds.
Buying foreign bonds is actually very difficult and is usually done as a part of mutual funds. Investing abroad is often very risky. The safest type of bond to purchase is one issued by the U.S. government.
Interest may be slightly lower, but again there is little or no risk involved. For best results, when the bond matures, it should be reinvested in another bond.
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