Posted 01 June 2022
A Breakdown of Bonds
Are you still wondering where you should invest your money? Below, I will review a few types of bonds and their risk levels.
Government bonds, also known as sovereign debt, are bonds issued to support government spending and obligations. The U.S. Treasury Department sells bonds during auctions throughout the year or they can be sold through secondary markets. This type of bond is considered to be the least risky investment of all investments because it is backed by the government. With low risk comes low interest rates, so generally government bonds will pay low interest rates. Government bonds are usually exempt from state and local taxes, and may offer periodic interest payments.
Corporate bonds are issued by companies to provide cash for particular projects. The purpose of these bonds is for the company to upgrade and become more profitable. Corporate bonds are generally broken down into three time groups: short-term (5 years or less), intermediate (5 to 12 years), and long-term (more than 12 years). Corporate bonds are a bit riskier than government bonds, which means higher interest rates. Although the risk is higher, corporate bonds are considered a safe and conservative investment.
Municipal bonds are bonds issued by a state, city, or county to finance capital expenditures. Generally the risk on municipal bonds are lower than corporate bonds, and the interest paid on municipal bonds are often times tax-exempt federally, and can also be exempt from state or local taxes.
Convertible bonds offer a more flexible relationship between the lender and borrower. This bond can be converted into a predetermined number of common stock shares. The amount of shares you can get from converting a bond is called the conversion ratio. An investor would want to convert the bond into stock if the stock sale exceeds the face value of the bond and interest payments. Converting a bond can only be done at certain times throughout the bond contract.
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