Essentially, investment bonds are loan agreements made between companies or governments and investors. In this case, it is the government or company that borrows money from the investor for set period of time to be used for funding purposes. In a sense, the company or government is indebted to you, the individual bond owner. Typically, the party issuing the bond offers them to the public for an approximate sum of $1,000. Thereafter, once the investment bond has been purchased by the investor, an amount of interest is paid to the owner of the bond throughout the loan period. The amount paid is also established at the beginning and noted on the bond note itself along with other information like the par value, coupon rate, and maturity date.
Another name for bonds is “fixed-income” securities. This means that the amount of income (interest) that the bond produces each year will remain at the same rate for the duration of the bond’s life. Thus, it is fixed or set regardless of circumstances. At present, there are four types of bonds that are offered and each one is defined by the part that is selling it. You have federal government bonds and those by other government agencies, corporate bonds, state and local government bonds, and bonds that are sold by foreign governments. (These may be more trouble to get than it is worth. )
First to addressed are those investment bonds that sold by the federal government. Issued by the treasury department, as is the case in the U. S. , these government bonds are commonly called “treasuries. ” You can find different types of treasuries including treasury notes, treasury bills, inflated-indexed notes, and treasury bonds, which are all differentiated by maturity rates and the quantities of interest paid. The treasury department is also the issuer of different types of saving bonds.
You also have investment bonds offered by government related agencies like the Federal Home Loan Mortgage Corporation, Federal National Mortgage Association, and the Government National Mortgage Association. These bonds are afforded coverage by the U. S. government and used for a variety of purposes, like home ownership.
Next, you have corporate bonds that are issued as debt by companies and sold on just like stocks on the exchanges. These kinds of investment bonds are what investors will be interested in, especially if the interest rate is good. Within this category, you have what are called high yield or “junk” bonds and convertible bonds. The former are issued by companies that don’t meet the official credit investment parameters, while the latter are bonds that can actually be changed into stocks under certain conditions.
Then you have municipal bonds or those that are issued by the state and local governments. In order to be competitive enough with other types of bonds, these municipal or “munis” are often adjusted to make them more appealing. Some are exempt from federal taxes. Other states waive the state and local income taxes to offer reasonable bonds.
What Are Investment Bonds
August 7, 2010
