What is a Bond and What are the Types of Bonds

 
Written by SodaCoffee Staff |
Updated:

A bond a type of government financial instrument sold by the government to people or countries as a way to raise money. They provide the government with a method of borrowing from its citizens. Bonds offer citizens with a secure way of investing with a guaranteed return. Investing in government bonds is more reliable than doing the same on the stock market. This is because you can redeem the bonds any time you want without incurring any loss. When a cash crunch faces the government, the government prints new cash to off the debts. However, like any other type of invested capital, the prices of bonds also fluctuate.

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Types of Bonds

Government Treasury Bonds

Treasury bonds are a type of bond issued by the government to pay for various government projects. They are also called marketable security bonds, meaning you can trade them after the initial purchase is made. They are liquid in nature; hence they have a secondary market. They are more secure and safe because they have less risk associated with them. They have one advantage in that these binds aren't liable to pay for all state and other local taxes; hence they are exempted from taxes.

Municipal Bonds

Municipal bonds are loans investors make to government entities like states, counties, cities, and other government institutions. The main objective of municipal bonds is to use bond funds to build public infrastructures such as highways, schools, hospitals, and systems. The municipality uses money from bonds to maintain the entities' infrastructure.

US Treasury Securities

The US federal government issues US treasury bonds. They are different types of securities issued by the US treasury, which include notes, bills, and bonds. US treasury is the largest and most liquid in the world of investment hence are considered as the safest.

Corporate Debt Securities

Corporate Debt securities are debt obligations from corporations for the purpose of generating operating cash flow and capital. A corporate bond is like a company selling its debt. They usually have a higher interest than the other types of bonds. The corporations can either be private or public. The funds gotten by the companies from selling bonds can be used to build infrastructure, purchase of equipment, or even manufacturing facilities. They are very dangerous because if a company declares deficits, the corporate bonds will not be worth it.

Zero-coupon Bonds

They are a type of bond which is issued by the U.S. Treasury, corporations, state and local government entities, and a variety of other sources. They have no regular interest payments. They are purchased at a considerable discount but redeemed at face value. You will not need to pay any taxes during the life of the bonds. At maturity, zero-coupon bonds investors will receive an amount equal to their investment, plus the interest accrued.

Before you purchase any type of bond, you should understand that there are many risks and rewards of investing in bonds. As an investor, ensure you figure out your investment goals and purchase the type of bond which fits your goals. Remember, it is always better to be conservative when it comes to investment.

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Author: SodaCoffee Staff
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