Bonds and their various types

A bond or debt security is like a loan in which the issuer obtains external funds to finance the expenses of a company or the government. They are paid at a fixed interest over a period of time.

There are several types of bonds that are sold by corporations, the federal government, state and local governments, and foreign governments. Recovering your initial investment is one of the advantages of investing in bonds. This is considered a good investment for those just starting out and those with a low risk tolerance. Investing in bonds is considered safe with good returns.

The federal government sells treasury bonds that have maturities ranging from three months or more. You can get them through the Treasury Department. Treasury bonds are backed by the federal government and are taxed based on the interest the bond earns. They include Treasury Bills or T-Bills, Treasury Bills or T-Notes, and Treasury Bonds.

You can find a government bond with a higher interest rate than what the federal government offers through your state or local government. They have a higher interest rate because the state and local government can go bankrupt, unlike the federal government. The common state and local government bond is called a tax-free municipal bond. It is free of income tax, including interest. State and local taxes can also be eliminated.

A corporate bond is basically debt sold by a company. You can obtain corporate bonds through the public stock markets. They usually have a higher interest rate, but they are also riskier because if the company goes bankrupt, the bond also loses its value.

Foreign bonds are very hard to come by and are often part of a mutual fund. There is also a lot of risk involved in investing in foreign bonds and others consider investing in bonds issued by the US government to be the safest. You may not get higher interest as there is almost no risk involved. You can reinvest the bond for good returns as soon as the bond reaches maturity.