Different Bond Types - An Overview
There are many different bond types that a bond investor can invest in and it is important to have different types of bonds in a portfolio because the portfolio. A diversified portfolio is less risky and having different bond types means different issuers, different maturities, and different interest payments. While most people refer to different bond types according to the type of issuer, bonds can also be classified by their characteristics. Below are some common bond types.
One of the most popular bond types is corporate bond. Corporations issue corporate bonds in order to raise money. Corporations can issue different bond types with varying characteristics, maturities and terms. Some corporate bonds are callable and with higher interests but they may be more risky than those with lower interest rates. Bond ratings such as those by Moody’s Investors Services will help investors decide between different bond types.
If you want safety in bonds, US government bonds usually offer the safest choices. There are a few different bond types issued by the US government such as T-bill, T-notes, and T-bonds. T-bills is short for Treasury Bills, T-bonds, Treasury Bonds, and T-Notes Treasury Notes. These three different bond types issued by the US government have different maturity dates and interest rates. Most people prefer investing in T-bills over the other two types.
Bonds don’t have to be issued by either corporations or the federal governments, other agencies and municipalities can also issue different bond types. Agency bonds are also considered safe investments, although some may not be as safe as US Treasury issues. Some of them have the backing and guarantee of the US government while others do not. Examples of agency bonds are Fannie Mae bonds and Freddie Mac bonds.
Many investors buy bonds, not because of safety and regular income but also the tax benefits some types of bonds can offer. Municipal bonds or munis for short are bonds issued by states, local governments, counties, townships, cities, and other municipalities. Municipal bonds are issued to finance projects such as building a bridge and building a road. Different bond types are issued based on the needs of the municipal issuer.
In general, having different bond types in a portfolio is a good thing. However, it is important to choose the bond types well because each bond type comes with different risks and return. An investor needs to find bonds that will offer uncorrelated returns, maturity dates, interest payments as well as risk. In order to increase the bond portfolio yield, higher risk bonds may need to be included but by having different bond types, the risks are lowered.
