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:

• 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.

  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.

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.

Other Kinds of Bonds:
Zero coupon bonds (Zeros) - These bonds are issued at a deep discount from face value (par value) and pay no periodic interest payments during their term. At redemption, the bondholder receives par value, which includes the interest that has accrued since issue. For example, you may purchase a zero coupon bond with a six-year term for $6,500, and collect $10,000 at maturity. One advantage of zeros is that you can invest relatively small amounts and choose maturity dates to coincide with times you know you'll need the money. For example, when college tuition bills will come due. One drawback of zeros, however, is that income taxes are due annually on the interest that accrues, even though you don't receive the actual payment until the bond matures. The exception occurs if you buy tax-exempt municipal zeros, on which no tax is due either during the term or at maturity. Another drawback is that zero coupon bonds are volatile in the secondary market, so if you have to sell before maturity, you might have a loss.

Secured bonds - These are backed by a lien on part of a corporation's assets such as equipments. If the issuer defaults, the investors may take possession of the collateral. A mortgage-backed bond is an example of a secured security, since the underlying mortgages can be foreclosed and the properties sold to recover some or all of the amount of the bond. Holders of secured bonds are at the top of the pecking order if an issuer misses an interest payment or defaults on repayment of principal.

Debentures - A debenture is an unsecured bond. Most bonds issued by large corporations are, in fact, debentures, which are backed by the corporation's reputation rather than secured by any collateral, such as the company's buildings or its inventory. Although debentures sound riskier than secured bonds, they generally aren't, since they are usually issued by well-established companies with good credit ratings.

Agency bonds - Government sponsored but privately owned corporations, including Fannie Mae and Freddie Mac, and certain federal government agencies, including Ginnie Mae, raise money by issuing bonds and short-term discount notes for sale to individual and institutional investors. The money raised by selling these bonds, also referred to as agency securities, is typically used to make reduced-cost loans available to specific groups, including home buyers, students, or farmers. Interest you earn on some-but not all-of these securities is exempt from state and local income taxes, but it is always federally taxable. Bonds issued by the federal agencies are backed by the government's full faith and credit, just as US Treasury securities are, but bonds issued by the sponsored corporations are generally not guaranteed.

Convertible bonds - These are corporate bonds that you can convert into common stock of the company that issues them rather than redeeming them for cash when they mature. The details the conversion, such as the price of the stock, are set when the bonds are issued. These bonds have a double appeal for investors concerned about volatility and high stock prices: Their prices go up if stock prices go up but usually drop less than the underlying stock price if that price should fall. And while convertible bonds typically provide lower yields than regular bonds, they provide higher yields than the underlying stock. Since convertible bonds are closely linked to the price of the stock, they tend to be more closely in sync with the stock market than the bond market.

Next-->> U.S. Savings Bonds: An American Institution.
 

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