Such as with stocks, there can be many different types of bonds on the market. Each kind of bond has its unique characteristics and advantages. Before you jump into the market to snap up bonds to your portfolio, you’ll first have to understand the different varieties of bonds that are available to purchase.
Types Of Bonds
Corporate Bonds – Corporate bonds are bonds that are issued by companies. This is also the kind of bond which we have used in our previous examples. Most large companies have the freedom to issue whichever number of bonds they see fit. Corporate bonds are at least 3 years in length of time, and longer term bonds can stretch beyond 15 years. As mentioned, corporate bonds give a higher yield than government bonds because they are more exposed to the risk of bankruptcy. However, if the investment turns out as panned by the investor, a corporate bond can yield a much higher interest rate than government bonds.
Treasuries/Municipal Bonds – Treasuries and municipals are government issued bonds. In general, bonds that are issued by government agencies offer huge tax discounts. The chances of government bonds defaulting are close to zero percent. These are just some of the factors that make them so attractive to investors. Due to their risk-free nature, government issued bonds often yield lower than other kinds of bonds.
Convertible Bonds – A convertible bond is essentially like a corporate bond but offers the investor a chance to the bond for a number of the company’s equity throughout the lifetime of the bond. Issuing convertible bond to investors is often used as a tactic to mitigate negative impressions from the public towards the issuing of new stocks by the company. Convertible bonds are popular among investors because they present more options for them on the table.
High-yield Bond “Junk Bond” – Junk bonds are known as speculative bonds due to their high default risk. This can come from companies that are not yet established or companies in highly volatile/cyclic industries. For these reasons, junk bonds are often rated “BB” or lower by credit agencies and offer a much higher percentage yield as compared to government controlled bonds.
You can click here to view our complete article going in depth on bond ratings.