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• Overview
• What are bonds?
• How do bonds work?
• How do you make money with bonds?
• What makes bond prices rise and fall?
• What are the major risks of bond investments?
• What are the different types of bonds?
• What is the relationship between maturity, risk and interest rates?
• How does a company’s credit rating affect the bonds it issues?
• How are the credit ratings of different issuers determined?
• What are some special features available in the bond market?
• What are convertible bonds?
• What are "junk" or "high-yield" bonds?
• What are bond indexes?
• How do you buy bonds?
• What are some drawbacks of buying individual bonds?
• How have bonds performed in the past?
• Do bonds have liquidity?
• Who is promising your return?

Bonds

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What are the different types of bonds?

U.S. Government Bonds:
These are the safest type of bond investments because they’re backed by the full faith and credit of the U.S. government. There are three types of U.S. government bonds, all of which pay income that is exempt from state and local taxes (but not federal tax):

• Treasury bills, with maturities from 90 days to one year, generally have the lowest interest rates.
• Treasury notes, with maturities from 2 to 20 years, usually have mid-range interest rates.
• Treasury bonds, with maturities from 10 to 30 years, typically have the highest interest rates among the U.S. government bonds. The higher rates help compensate for the higher risk of the long maturities.

Municipal Bonds:
These are bonds issued by state or local governments. They carry more risk than Treasuries because they’re dependent on the credit worthiness of the governments that issue the bonds. To compensate for the higher risk, the income from "munis" is always free of federal taxes, and is often free of state and local taxes as well ("triple tax free"). While the coupon rate for municipal bonds is usually lower than the rate for taxable bonds, the net return ("effective" or "after tax" yield) to high income investors may be higher.    More

Corporate Bonds:
These are issued by individual companies, and have the highest risk and return potential among fixed-income investments. However, there is a wide range within the corporate bond market. Bonds issued by solid, blue-chip companies carry less risk than bonds from smaller or less stable companies. Companies with lower credit ratings will issue bonds with higher interest rates, providing potentially higher income to investors. Corporate bond maturities can be short term (1-5 years), intermediate term (5-15 years) or long term (15+ years).