Five Major Types of Bonds in the U.S. Market

There are many types of bonds available for investors to purchase in the U.S market. However, it is up to you or your financial advisor to choose which types of bonds to purchase. Below is a brief explanation of five bonds that are available in the U.S market.

What are Bonds?

Bonds are debt securities that are issued by organizations in an attempt to raise capital for a variety of reasons. When purchasing a bond, you are lending money to the firm or institution that issued it. In exchange for your money, the issuer agrees to pay you interest. Additionally, the issuer agrees to return the face value as soon as the bond matures or is called.

Corporate Bonds

Corporate bonds are bonds that are issued by corporations in order to raise money to expand their business. However, unlike stocks, bonds do not provide you with the opportunity to obtain ownership interest in the issuing firm.

Municipal Bonds

Municipal or Muni bonds are bonds that are issued by cities, counties, school districts, and any other government entity that exist below the state level. Muni bonds are issued for the purpose of financing improvements in infrastructure or adding buildings. Examples would be street and highway repair, school expansion, and building hospitals.

Agency bonds

Agency bonds are issued by government sponsored enterprises and federal government agencies. Normally there are minimum amounts that must be met before investing in agency bonds - usually $10,000 for the initial investment and $5,000 for each additional investment. However, a $25,000 investment is required when investing in Ginnie Mae Federal Agency bonds. Interest from most of the agency bonds is exempt from state and local taxes. The agency bond market is usually liquid; meaning it is often a market where investments can be quickly purchased and sold.

Government bonds

Government bonds are bonds that are issued by the government to support government spending. The two major government bonds in the United States are the savings bond and the Treasury bond. Government bonds are less risky than most others because they are backed by the government.

Commercial paper

Commercial paper is a money market security sold by large financial institutions and corporations as a way to raise money to meet short-term debt obligations. The maturity dates for commercial paper range from one to 270 days. Since commercial paper is not backed by collateral, only firms with superior credit ratings are able to sell their commercial paper at acceptable prices. Commercial paper is typically sold at a discount and carries a higher interest rate than most bonds.