Choosing Between Different Bond Types

By Jennifer Wyatt

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.

A corporate bond is a type of bond that is issued by a corporation, rather than a government, an agency or other types of issuers. Again, a corporation can issue bonds with different characteristics which some investors may refer to as different bond types. Corporate bonds are often more risky than bonds issued by the US government and municipal bonds. When investing in bonds you need to pay attention to the bond ratings.

Another type of bonds that are popular among investors is the type issued by the US government. These are called US Treasury bills or T-bills, T-bonds, and T-notes. These three different bond types issued by the government have different maturities. T-bills have the shortest maturity dates whereas T-bonds have the longest. In general, investors like Treasury issues because they are backed by the full faith and credit of the US government.

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.

Municipal bonds are also considered safe investments but they also usually do not pay as much interest as corporate bonds. However, municipal bonds or munis for short offer added tax advantages. Their interest payments are usually tax free. Municipal bonds are issued by municipalities such as schools, cities, towns, counties, and states. They can issue different bond types to finance different projects. The terms of different municipal bonds can vary significantly.

Investing in different bond types will enable investors to lower their risk and increasing their returns. By having not only bonds by different issuers but also bonds with different terms, maturity dates, different interest rates and interest payment schedule as well as different risk levels, investors can smooth out the fluctuations of their bond portfolio. There are many different bond types to choose from and there are many tools to help investors choose among them.

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For more information about the Different Bond Types and their individual strengths and weaknesses, stop by the Corporate Bonds information website today.

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