Types of Bonds
In the world of investments, bonds are a rather common option and often seen as a safe way to invest money. Of course, there are different kinds of bonds available, each of which provide different monetary benefits. For someone considering investing in bonds, knowing the difference and length of time required for the investment to mature is very important.
Government bonds are typically fixed-income securities that are narrowed down further into three different categories. Government bond bills mature in less than a year. Government bond notes mature in anywhere from one to 10 years, depending on the investment. Lastly, full government bonds reach maturity in at least 10 years. The percentage of maturity and the increase in value grows with the length of time the government holds the bond, although this does extend the amount of time investors are not able to claim their money.
Corporate bonds are issued by a company in a similar manner as stock. Most large businesses have the ability to issue different amounts of debt. Although most corporate bonds last for around five years or so, there are intermediate corporate bonds that last anywhere from five to 12 year. Additionally, there are long-term bonds that are good for even longer than 12 years. There is a greater risk with corporate bonds as predicting the future of a company, especially a decade down the road, proves difficult. However, corporate bonds do generally provide a higher rate of return than government bonds.
These bonds are slightly more of a risk than government bonds, but not nearly as much of a risk as corporate bonds. Municipal bonds are given out by cities or municipalities, and the returns are free from any sort of government taxes. As long as the city has a solid financial foothold, municipal bonds are a good investment. That is, as long as the city does not go bankrupt. Should this happen, the municipal bonds are typically void.
Large cities declaring bankruptcy is becoming more of a potential risk though. The city of Detroit recently became the largest city in the United States to ever file for bankruptcy protection. While there have been dozens of other cities to have done this, if Detroit makes it out in an improved state in the next several years, the chance of more cities filing for bankruptcy protection is likely to increase. If this should happen, you might still receive a portion of your investment back, but in all actuality, you will take a loss on the process. That is why you need to be careful with the municipality you are purchasing the bonds from.
Zero Coupon Bonds
These are known as the riskiest form of bonds. The bond does not have a set interest rate or 'coupon' payment. Instead, it is more of a discount. For example, you might purchase the bond for $300, and in 10 years if it is trading at $1,000, it means you receive the $1,000 at the end of the set time frame for the bond.