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.
Corporate bonds are the most popular type of bonds. Corporate bonds are IOUs issued by corporations to raise money for working capital. Corporations can issue different bond types with different prices, interest rates, call features, and maturity dates. Corporate bonds can be risky if the issuing corporation is in trouble. By looking at bond ratings such as those published by Moody's Investors Services or S&P, investors can see which ones are safer than others.
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.
Agency bonds are also relatively safe. Agency bonds may not be as safe as the US government bonds since they are issued by agencies related to the government. Different bond types issued by agencies may or may not have the full backing of the US government. Some agency bonds are riskier than others. Examples of agency bonds are bonds issued by Fannie Mae and Freddie Mac.
If you want the added tax benefits of investing in bonds, then municipal bonds is the type of bond that can offer tax benefits. Municipal bonds are issued by municipalities such as cities, states, towns, and schools. There are also different bond types issued by municipal issuers. Municipal bonds are issued in order to finance a large scale project such as building a road or a bridge. In general, municipal bonds are considered safe investments.
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.
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For additional resources on the Different Bond Types and each of their individual benefits and drawbacks, click over to the Corporate Bonds information website today.
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