Types of Bonds
Different types of bonds serve different purposes. Understanding the categories helps you build a balanced fixed-income portfolio.
Government Bonds
U.S. Treasury bonds are backed by the federal government and considered among the safest investments. Treasuries come in different maturities: T-Bills (under 1 year), T-Notes (2-10 years), and T-Bonds (20-30 years). They pay lower yields due to low default risk.
Corporate Bonds
Issued by companies, corporate bonds pay higher yields than Treasuries to compensate for greater risk. Investment-grade bonds (rated BBB- or higher) are relatively safe. High-yield (junk) bonds offer higher returns but come with significant default risk.
Municipal Bonds
Issued by state and local governments to fund public projects. The key advantage: interest is often exempt from federal taxes (and sometimes state taxes). This makes them attractive for investors in high tax brackets.
Treasury Bonds
- Lowest risk
- Lowest yields
- Backed by U.S. government
Corporate Bonds
- Higher yields
- Credit risk varies
- Investment-grade or high-yield
Municipal Bonds
- Tax advantages
- State/local government
- Good for high earners
- Treasury bonds are the safest with lowest yields
- Corporate bonds offer higher returns with more risk
- Municipal bonds provide tax-free interest income
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