What is a bond?A bond is a loan , in which you are the lender and the borrower of your money is normally a company or the government. You can think of a bond as an IOU given by a borrower (a company or the government) to a lender (you the investor). That company or government will promise to pay you your money back in full on a specified date. You'll also receive interest payments from that company or government as long as your money is in their possession.
Companies and governments usually offer bonds to the public, in exchange for their money, in order to fund certain operations, like building bridges, financing long-term investments, or paying off debts. In the investment world, buying a bond is considered to be a safe long-term investment, however, certain bonds can be really risky. Below I explain the different types of bonds and how investing in them can benefit you.
-Treasury Bonds are issued by the U.S. Treasury. These bonds are backed by the full faith and credit of the U.S. government, and are considered to be the safest bonds you can buy. Due to this, they tend to offer you lower interest payments than other bonds.
- Agency Bonds are issued by government-sponsored enterprises, such as Fannie Mae, Freddie Mac, and the Tennessee Valley Authority. These bonds have a higher level of risk than Treasury Bonds. Which is why they'll offer you a higher return on your investment.
- Municipal Bonds are issued by states, cities, counties, and towns. Most municipal bonds are exempt from federal, state, and local income taxes. As a result, their interest payments to you will be lower than other taxable bonds.
- Corporations issue Corporate Bonds, which are generally riskier and more profitable than government and municipal bonds.
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