By Arjun Chandrasekar.
Bonds are basically fixed-income securities, and they’re normally issued by companies or governments. The purpose of a bond is to loan money, and since there’s a burdened interest rate, there will be a stream of income. Compared to investing in stocks, bonds aren’t as volatile.
There are four main types of bonds: Agency, Corporate, Government, and Municipal. Let’s go over each one in depth.
Agency Bonds
These are bonds that are issued by all government organizations except the Treasury. They’re backed up with fixed interest rates and regular payments, having a stream of passive income. However, fixed interest rates can be very risky as the market can inflate and deflate, meaning loss of income is a possibility.
Corporate Bonds
These bonds are issued by companies. Based on the company’s overall performance, the risk varies. So it’s very important that investors look into the current news of the company, the updates and launches happening, and analyst opinions on it.
Government Bonds
These are bonds that are issued by the government or Treasury, unlike Agency bonds. Investors receive fixed interest rates and regular streamed payments, called coupon payments. Again, the inflation and movement of the market predicts the riskiness of the bond. Within the title of government bonds comes other types including Treasury Inflation Protected Securities which increase and decrease with inflation and deflation respectively. This is just for the US, but in different countries there are different types of government bonds.
Municipal Bonds
These are bonds that are issued by municipalities, states, or counties. The plus side of holding these bonds are that they’re exempt from taxes, federal, state, local. Municipal bonds can be categorized into Revenue Bonds and General Obligation Bonds. Revenue Bonds are issued by the municipality but the payments and interest are done by 3rd party organizations. The municipality is just issuing the bund and managing what’s occurring while the 3rd party organization is dealing with the funds and financial planning. On the other hand, general obligation bonds aren’t backed up by a municipality. Revenue bonds are definitely riskier than General Obligation bonds, and Municipal bonds as a whole are less risky than corporate bonds.
