Choosing Between Different Bond Types

Choosing Between Different Bond Types
by Jennifer Wyatt

Investors can buy different bond types in their portfolio. It is good having different bond types because of diversification. A portfolio should be properly allocated and diversified. Different bonds offer different risks, maturities, interest rates and terms. Bond types are usually classified according to the issuer but sometimes they are categorized based on their characteristics. A bond issuer can issue bonds of different characteristics. Examples of different bond types are given below.

A corporate bond is a type of bond that is issued by a corporation, rather than a government, an agency or other types of issuers. Again, a corporation can issue bonds with different characteristics which some investors may refer to as different bond types. Corporate bonds are often more risky than bonds issued by the US government and municipal bonds. When investing in bonds you need to pay attention to the bond ratings.

Another type of bonds that are popular among investors is the type issued by the US government. These are called US Treasury bills or T-bills, T-bonds, and T-notes. These three different bond types issued by the government have different maturities. T-bills have the shortest maturity dates whereas T-bonds have the longest. In general, investors like Treasury issues because they are backed by the full faith and credit of the US government.

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Bonds don’t have to be issued by either corporations or the federal governments, other agencies and municipalities can also issue different bond types. Agency bonds are also considered safe investments, although some may not be as safe as US Treasury issues. Some of them have the backing and guarantee of the US government while others do not. Examples of agency bonds are Fannie Mae bonds and Freddie Mac bonds.

If you want the added tax benefits of investing in bonds, then municipal bonds is the type of bond that can offer tax benefits. Municipal bonds are issued by municipalities such as cities, states, towns, and schools. There are also different bond types issued by municipal issuers. Municipal bonds are issued in order to finance a large scale project such as building a road or a bridge. In general, municipal bonds are considered safe investments.

Investing in different bond types will enable investors to lower their risk and increasing their returns. By having not only bonds by different issuers but also bonds with different terms, maturity dates, different interest rates and interest payment schedule as well as different risk levels, investors can smooth out the fluctuations of their bond portfolio. There are many different bond types to choose from and there are many tools to help investors choose among them.

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