- Tax Planning
- Investments 1: Before you Invest
- Investments 2: Your Investment Plan
- Investments 3: Securities Market Basics
- Investments 4: Bond Basics
- Investments 5: Stock Basics
- Investments 6: Mutual Fund Basics
- Investments 7: Building Your Portfolio
- Investments 8: Picking Financial Assets
- Investments 9: Portfolio Rebalancing and Reporting
- Retirement 1: Basics
- Retirement 2: Social Security
- Retirement 3: Employer Qualified Plans
- Retirement 4: Individual and Small Business Plans
- Estate Planning Basics
Describe the Major Bond Categories
While there are many different types of bonds, most bonds can be grouped into one of six major categories: corporate bonds, U.S. Treasury debt securities, municipal bonds, agency bonds, international bonds, and U.S. Treasury savings securities. I will address the eight key areas for each of these types of bonds: issuer, par value, taxes, risk and return, ratings, trading, and call provisions.
There are three main types of corporate bonds: secured corporate bonds, unsecured corporate bonds, and debentures. Secured corporate bonds (or asset-backed bonds) are guaranteed by company collateral, such as leases, receivables (e.g., capital equipment), or property liens (mortgage-backed bonds). Unsecured corporate bonds are not backed by collateral. These bonds are more risky; therefore, companies must pay a higher return on these bonds to sell them. Debentures are long-term unsecured bonds that are backed solely by the issuer’s integrity. The list below summarizes characteristics of corporate bonds:
- Issuer: Corporate bonds are issued by U.S. corporations.
- Par value: Corporate bonds are issued in amounts of $1,000 and greater.
- Maturity: Corporate bonds can have varying lengths of maturity. Generally, the maturity length on short-term corporate bonds ranges from one to five years; intermediate-term corporate bonds typically mature after six to ten years; and long-term corporate bonds typically mature after eleven or more years.
- Taxes: Corporate bonds offer no tax advantages to the holder and are subject to federal, state, and local taxes.
- Risk and return: Corporate bonds are riskier than government bonds, but corporate bonds offer higher returns. Remember, the higher a company’s bond rating, the lower the risk involved in purchasing that company’s bonds.
- Ratings: Corporate bonds are generally rated by one or both of the major bond-rating companies (Standard & Poor’s and Moody’s).
- Trading: Corporate bonds may be purchased by brokers, either over the counter (OTC) or through an organized exchange.
- Call provision: Corporate bonds are generally callable.
U.S. Treasury Debt Securities
The U.S. Treasury issues three main types of debt securities: Treasury bills, Treasury notes, and Treasury bonds. Treasury bills are short-term debt obligations; these bonds are issued at a discounted price and may be redeemed at par value upon maturity in three, six, or twelve months. Treasury notes are intermediate-term debt obligations that are issued at or near par value; interest is paid semiannually on Treasury notes. Treasury bonds are long-term debt obligations that are issued at or near par value; interest is paid semiannually on Treasury bonds. The list below summarizes characteristics of U.S. Treasury debt securities:
- Issuer: U.S. Treasury debt securities are issued by the U.S. government.
- Par value: Treasury notes are issued in amounts ranging from $1,000 to $5,000, and Treasury bonds are issued in amounts ranging from $10,000 to $1,000,000.
- Maturity: Maturity length for U.S. Treasury debt securities ranges from three months (for Treasury bills) to more than thirty years (for Treasury bonds).
- Taxes: U.S. Treasury debt securities are exempt from state and local taxes, but not federal taxes.
- Risk and return: U.S. Treasury debt securities are government securities, so they are considered default risk-free. However, because the risk on these bonds is lower, the returns are also lower.
- Ratings: U.S. Treasury debt securities are issued by the federal government; therefore, they are not rated.
- Trading: Newly issued bonds are traded at auction at the Federal Reserve. Outstanding bonds are traded by brokers over the counter.
- Call provision: U.S. Treasury debt securities are generally not callable.