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Bonds: Major types of bonds

There are three major types of bonds: Government, Corporate and Municipal Bonds.

  1. Government Bonds (Treasuries) - A bond issued by a national or federal Government. These are considered safe investments because they are backed by the full credit and faith of the U.S. Government. . In the U.S., interest on debt securities issued by U.S. Treasury is not subject to state or local income tax. The Department of Treasury issues bills, notes, and bonds. The primary difference between these three types of investments are:

  2.  
    • U.S. Treasury Bills (T-Bills) - These are short term treasuries maturing in less than a year. They come in three maturities: 3 months, 6 months and 1 year. The 3 month and 6 month bills are auctioned on Mondays and the 1 year bills sell every four weeks. The minimum purchase amount for all bills is $1000. 3 and 6 months bills are sold at discount to par value because interest is paid at the time it matures. Interest is paid semi-annually for the 1 year bill.
       
    • U.S. Treasury Notes - These are intermediate term treasuries maturing in 1 to 10 years. They come in maturities of 2 years, 5 years, and 10 years, and are sold in minimum amounts of $1000. Two-year notes are sold monthly. Five-year and 10-year notes are sold every three months starting in February. Interest is paid every six months.
       
    • U.S. Treasury Bonds (T-Bonds) - These are long term bonds that come in only one maturity of 30 years. They are sold to individuals in multiples of $1000. The 30-year bonds are sold three times a year, in February, August, and November. Interest is paid semi-annually.
  3. Corporate Bonds - These bonds are issued by corporations to raise capital. They have a broad range of risk, and so they are rated by third parties as to their credit quality. Investing in corporate bonds can be very conservative or very risky, depending on their rating. They offer a higher yield because they carry a higher risk of default than government bonds.
     
  4. Municipal Bonds (Muni) - Municipal bonds or muni's are issued by a state or municipalities such as hospitals, schools, etc. Two varieties of muni bonds are general obligation bonds--which are backed by the full taxing authority of the government, and revenue bonds--which are backed only by the receipts from a specific source of revenue, such as tunnel or bridge toll. The yield on muni's are usually lower than for a taxable bond, but they are very popular with people in higher tax brackets for their tax free status. Muni's are free from federal income taxes and, usually income taxes of the the issuing state. They are also rated by third-parties as to their credit quality.

What are TIPS?

No, it's not a tip you give to a waiter or a waitress. Treasury Inflation-Protected Securities or TIPS, are a special type of Treasury notes and bonds. As with other notes and bonds, when you own an inflation-indexed note you receive interest payments every six months and a payment of principal when the security matures. The difference is this: Unlike the situation with other notes, the interest and redemption payments for TIPS are tied to inflation.

The inflation rate is calculated by taking the non-seasonally-adjusted U.S. city average Consumer Price Index for All Urban Consumers (CPI-U), which is published every month by the Bureau of Labor Statistics. These notes currently carry a maturity of 10 years and are auctioned off once every three months.

Next==>> Other different types of Bonds

 

         

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When you 're diagnosed with cancer, you start to bargain with God: "Let me get through this, and I'll take better care of myself. I'll get my priorities in order. I'll learn to live every day to the fullest." Isn't it sad that you have to get sick before giving yourself permission to live life to the fullest? -- Robert Schimmel Look at Life in different & Positive ways