Bonds are a common investment, but not everyone knows exactly what they are, and how they work. To put it simply, when you buy a bond, you are essentially loaning the company/government money, and they pay it back at an interest rate that has been set. Once your bond reaches maturity, you receive the amount you “loaned” out, plus the interest. What a fabulous idea!!!
Here are some common bond types:
Discount bonds: Treasury Bills, are purchased at less than face value. Then, at maturity, the bondholder is paid the full face value.
Coupon bonds: These are issued with interest payment coupons attached; they pay interest at specified intervals (quarterly, yearly, etc.)
U.S. Treasury bonds: These are usually thought of as the safest form of investment. They include: savings bonds, Treasury Bills (T-Bills), Treasury Notes, Treasury Bonds and Treasury Inflation-Protected Securities (TIPS).
Municipal bonds: These are issued by state and local governments. Interest income is often exempt from federal income tax and income tax in the issuing state, and who doesn’t like to be exempt from tax income??
Corporate bonds: These are issued through a representative bank or by the company directly. They are considered riskier than government-issued bonds, but usually pay higher interest rates. “Junk” bonds are issued by companies at the highest risk of failure. So, while the payoff can be good, there is definitely a risk, something to think about.