There are at least five types ofbonds. They each have different sellers, purposes, buyers, and levels ofrisk vs. return.
Key Takeaways
- There are five main types of bonds: Treasury, savings, agency, municipal, and corporate.
- Each type of bond has its own sellers, purposes, buyers, and levels ofrisk vs. return.
- If you want to take advantage of bonds, you can also buy securities that are based on bonds, such as bond mutual funds. These are collections of different types of bonds.
- One of the differences between bonds and bond funds is that individual bonds are less risky than bond mutual funds.
U.S. Treasury Bonds
The most important bonds are the U.S.Treasury bills, notes, andbondsissued by the Treasury Department. They are used toset the rates for all other long-term, fixed-rate bonds. The Treasury sells themat auction to fund the operations ofthe federal government.
These bonds are also resold on thesecondary market. They are the safest, since they are guaranteed by theUnited States government. That means they also offer the lowest return. They are owned by almost everyinstitutional investor, corporation, andsovereign wealth fund.
Note
Treasury Inflation-Protected Securities are Treasury bonds that protect against inflation.
Savings Bonds
Savings bondsare also issued by theTreasury Department. These bonds are meant to be purchased byindividual investors.They are issued in low-enough amounts to make them affordable for individuals.I bondsare like savings bonds, except they are adjusted for inflation every six months.
Agency Bonds
Quasi-governmental agencies,likeFannie MaeandFreddie Mac,sell bonds that are guaranteed by the federal government.
Municipal Bonds
Municipal bondsare issued by various cities. They are tax-free but have slightly lower interest rates than corporate bonds.They are slightly more risky than bonds issued by the federal government. Cities occasionally do default.
Corporate Bonds
Corporate bondsare issued by all different types of companies. They are riskier than government-backed bonds, so they offer higher rates of return.They are sold by the representative bank.
There are three types of corporate bonds:
- Junk bondsor high-yield bonds are corporate bonds from companies that have a big chance of defaulting. Theyoffer higher interest rates to compensate for the risk.
- Preferred stocksaretechnically stocks, but they act like bonds. They pay you a fixed dividend at regular intervals. They are slightly safer than stocks in case of a bankruptcy. Holders get paid after bondholders but before common stockholders.
- Certificates of depositarelike bonds issued by your bank. You essentially loan the bank your money for a certain period of time for a guaranteed fixed rate of return.
Types of Bond-Based Securities
You don't have to buy an actual bond to take advantage of its benefits. You can also buy securities that are based on bonds. They include bondmutual funds, which are are collections of different types of bonds.
One of the differences between bonds and bond funds is that individual bonds are less risky than bond mutual funds. Assuming that there are no defaults, the holder of an individual bond gets his principal sum intact upon the instrument’s maturity. With bond funds, the investor risks losing his principal should prices fall.
Bond securities also includebond exchange-traded funds (ETFs). They perform like mutual funds, but they don't actually own the underlying bonds. Instead, ETFs track the performance of different classes of bonds. They pay out based on that performance.
Bond-basedderivativesare complicated investments that get their value from the underlying bonds. They include the following:
- Optionsgivea buyer the right, but not the obligation, to trade a bond at a certain price on an agreed-upon future date. The right to buy a bond is called a"call option."and the right to sell it is called the"put option." They are traded on a regulated exchange.
- Futures contractsare like options, except they obligate participants to execute the trade. They are traded on an exchange.
- Forward contracts are like futures contracts, except they are not traded on an exchange. Instead, they are tradedover-the-counter either directly between the two parties or through a bank.They are customized to the particular needs of the two parties.
- Mortgage-backed securitiesare based on bundles of home loans. Like bonds, they offer rates of return based on the value of the underlying assets.
- Collateralized debt obligations (CDOs)are based onauto loans andcredit card debt. They also include bundles ofcorporate bonds.
- Asset-backed commercial paperis a one-year corporate bond package. The value is based on that of underlying commercial assets. These include real estate, corporate fleets, or other business property.
- Interest rate swapsare contracts that allow bondholders to swap their future interest rate payments. They occur between a holder of a fixed-interest bond and one holding a flexible-interest bond. They are traded over-the-counter.
- Total-return swaps are like interest rate swaps, except the payments are based on bonds, a bond index, an equity index, or a bundle of loans.
Frequently Asked Questions (FAQs)
How do bonds work?
Bonds are a loan from an investor to a corporation, government, municipality, or other agency. In exchange for the investment, the entity agrees to repay the investor at a fixed interest rate over a set period of time. Bonds come with a higher guarantee of repayment than capital investments.
How do you buy bonds?
Depending on the type, you can purchase bonds through brokers or exchange-traded funds, or from the U.S. government at TreasuryDirect. You may need to have at least $1,000, the typical starting face value for most bonds.
What is a coupon rate for bonds?
The coupon rate is just another term for the bond's interest rate.
FAQs
There are five main types of bonds: Treasury, savings, agency, municipal, and corporate. Each type of bond has its own sellers, purposes, buyers, and levels of risk vs. return. If you want to take advantage of bonds, you can also buy securities that are based on bonds, such as bond mutual funds.
What is the risk level of bonds? ›
These are the risks of holding bonds: Risk #1: When interest rates fall, bond prices rise. Risk #2: Having to reinvest proceeds at a lower rate than what the funds were previously earning. Risk #3: When inflation increases dramatically, bonds can have a negative rate of return.
What type of bonds have the highest level of risk? ›
A non-investment-grade bond is a bond that pays higher yields but also carries more risk and a lower credit rating than an investment-grade bond. Non-investment-grade bonds are also called high-yield bonds or junk bonds.
What are the different types of bonds in risk management? ›
Most bonds fall into four general categories: corporate, government, government agency, and municipal. Risk Considerations: The primary risks associated with corporate bonds are credit risk, interest rate risk, and market risk.
What is the different types of bonds? ›
There are three primary types of bonding: ionic, covalent, and metallic.
What is the risk level of Treasury bonds? ›
Treasury bonds are considered risk-free assets, meaning there is no risk that the investor will lose their principal. In other words, investors that hold the bond until maturity are guaranteed their principal or initial investment.
Which bonds are the lowest risk? ›
The three types of bond funds considered safest are government bond funds, municipal bond funds, and short-term corporate bond funds.
What are the 5 different types of bonds? ›
There are five main types of bonds: Treasury, savings, agency, municipal, and corporate. Each type of bond has its own sellers, purposes, buyers, and levels of risk vs. return. If you want to take advantage of bonds, you can also buy securities that are based on bonds, such as bond mutual funds.
What are the risks of long term bonds? ›
There are two primary reasons why long-term bonds are subject to greater interest rate risk than short-term bonds: There is a greater probability that interest rates will rise (and thus negatively affect a bond's market price) within a longer time period than within a shorter period.
What are the 5 chemical bonds? ›
The electrical forces, called chemical bonds, can be divided into five types: ionic, covalent, metallic, van der Waals, and hydrogen bonds.
There are four types of bonds or interactions: covalent, ionic, hydrogen bonds, and van der Waals interactions.
What are the four main types of bonds? ›
Four main bonding types are discussed here: ionic, covalent, metallic, and molecular.
What are the 4 types of bonds and describe them? ›
Types of Chemical Bonds or Bonding in Chemistry
- Ionic Bond. An ionic bond is generated by the complete transfer of valence electrons to achieve stability. ...
- Covalent Bond. A covalent bond is formed when the electron pairs between atoms or constituents are shared. ...
- Hydrogen Bond. ...
- Metallic Bond.
The most important common characteristics of a bond, relate to the bond issuer, maturity date, coupon, face value, bond price, and bond yield.
How many main types of bonds are there? ›
Bonds are issued by federal, state, and local governments; agencies of the U.S. government; and corporations. There are three basic types of bonds: U.S. Treasury, municipal, and corporate.
What are the most common types of bonds? ›
There are several different types of bonds, but the most common are:
- Government bonds.
- Municipal bonds.
- Corporate bonds.
- Treasury bonds.
Since they're backed by the full faith and credit of the U.S. government, treasury bonds are considered risk-free. But treasury bonds don't yield interest rates as high as corporate bonds. While treasury bonds are subject to federal tax, they're exempt from state and local taxes.
What are the top 5 bonds? ›
Best bonds to buy in 2023
| Name | Ticker | Yield |
|---|
| iShares TIPS Bond ETF | (NYSEMKT:TIP) | 7.5% |
| Nuveen High-Yield Municipal Bond Fund | (NASDAQ:NHRMX) | 5.1% |
| Vanguard Short-Term Corporate Bond Index Fund | (NASDAQ:VSCSX) | 5.2% |
| Guggenheim Total Return Bond Fund | (NASDAQ:GIBIX) | 5.1% |
4 more rowsHere are six types of bonds to get you started:
- U.S. government bonds and securities.
- Municipal bonds, or "munis"
- International and emerging markets bonds.
- Corporate bonds.
- Bond ETFs.
- Green bonds.
A quintuple bond in chemistry is an unusual type of chemical bond, first reported in 2005 for a dichromium compound. Single bonds, double bonds, and triple bonds are commonplace in chemistry.
Short-term bonds can be relatively low-risk, predictable income. Stronger returns can be realized when compared to money markets. Some bonds even come tax-free. A short-term bond offers a higher potential yield than money market funds.
What is the duration risk? ›
Duration risk, also referred to as interest rate risk, is the risk that changes in interest (borrowing) rates may reduce or increase the market value of a fixed-income investment. The interest rate is the cost of borrowing, while bond prices reflect the market value of bonds.
Are short-term bonds more risky? ›
Shorter-term bonds are subject to greater reinvestment risk
In two words: reinvestment risk. To illustrate how this works, consider an example using one-month and five-year Treasuries in February 2007.
What can form 5 bonds? ›
The outer d orbitals in phosphorus permit an expansion of the octet, which leads to the +5 state, with five actual covalent bonds being formed in compounds, a condition impossible for nitrogen to achieve.
What are 5 covalent bonds examples? ›
Five examples of covalent bonds are hydrogen (H₂), oxygen (O₂), nitrogen (N₂), water (H₂O), and methane(CH₄).
What are the 3 types of bonds and how are they different? ›
What is the difference between ionic, covalent, and polar bonds? The difference between bond types is simply how they share electrons. Covalent bonds share evenly, polar share unevenly, and ionic bonds don't share at all.
What are the 4 types of chemical bonds strongest to weakest? ›
Therefore, the order of strength of bonds from the strongest to weakest is; Ionic bond > Covalent bond > Hydrogen bond > Van der Waals interaction. Q. Q.
What are the 3 main types of bonds? ›
There are many types of chemical bonds that can form, however the 3 main types are: ionic, covalent, and metallic bonds.
What are the 3 types of bond categories? ›
There are three main types of bonds:
- Corporate bonds are debt securities issued by private and public corporations.
- Investment-grade. ...
- High-yield. ...
- Municipal bonds, called “munis,” are debt securities issued by states, cities, counties and other government entities.
The fourth bond (quadruple bond) if formed would be pointing away from the two carbons. In order for this bond to exist, the other three bonds need to be tremendously bent and this is energetically very unfeasible. This strain thus resists the formation of the quadruple bond.
Bonds in general are considered less risky than stocks for several reasons: Bonds carry the promise of their issuer to return the face value of the security to the holder at maturity; stocks have no such promise from their issuer.
Are bonds a high or low risk investment? ›
Risk: Bonds are generally thought to be lower risk than stocks, though neither asset class is risk-free. “Bondholders are higher in the pecking order than stockholders, so if the company goes bankrupt, bondholders get their money back before stockholders,” Wacek says.
How safe are bonds right now? ›
“Compared to stocks, there is a much lower likelihood of losing your initial investment because the issuer of the bond agrees to pay interest and principal back at specific dates.” The chances of default are even lower when you're talking about investment-grade bonds or bonds issued by the federal government.
Are bonds safe if the market crashes? ›
Buy Bonds during a Market Crash
Government bonds are generally considered the safest investment, though they are decidedly unsexy and usually offer meager returns compared to stocks and even other bonds.
Which type of bond is the safest? ›
U.S. Treasury bonds are considered one of the safest, if not the safest, investments in the world. For all intents and purposes, they are considered to be risk-free. (Note: They are free of credit risk, but not interest rate risk.) U.S. Treasury bonds are frequently used as a benchmark for other bond prices or yields.
What does bond duration mean? ›
Duration is a measurement of a bond's interest rate risk that considers a bond's maturity, yield, coupon and call features. These many factors are calculated into one number that measures how sensitive a bond's value may be to interest rate changes.
Is now a good time to buy bonds 2023? ›
More broadly, investing in bonds is far more attractive this year than it has been for a while. That's no guarantee of strong returns for bonds in 2023, but it does mean that investors can feel a bit more comfortable about their bond allocations in the coming year and beyond.
Where is the safest place to put your retirement money? ›
Most of our experts agree that one of the safest places to keep your money is in a savings account insured by the Federal Deposit Insurance Corporation (FDIC). “High-yield savings accounts are an excellent option for those looking to keep their retirement savings safe.
What is best time to buy bonds? ›
For investors in or nearing retirement who want to reduce their exposure to stock market volatility, the period before a recession may be a good time to consider shifting some money from stocks to bonds.
