Smart Bond Investing—Types of Bonds
Once you've decided to invest in bonds, the next question is—which type of bond? Bonds tend to be broadly categorized according to who is issuing them. For instance, "treasuries" are issued by the U.S. government’s Department of the Treasury, "corporates" by corporations and "munis" are issued by states, cities and other municipalities.
U.S. Treasury securities ("Treasuries") are issued by the federal government and are considered to be among the safest investments you can make, because all Treasury securities are backed by the "full faith and credit" of the U.S. government. This means that come what may—recession, inflation, war—the U.S. government is going to take care of its bondholders.
Treasuries are also liquid. A group of nearly 20 primary dealers are required to buy large quantities of Treasuries every time there is an auction and stand ready to trade them in the secondary market.
There are other features of Treasuries that are appealing to the individual investor. They can be bought in denominations of $100, making them affordable, and the buying process is quite convenient. You can either buy Treasuries through brokerage firms and banks, or you can simply follow the instructions on the TreasuryDirect® website. For more information, see the Buying and Selling Treasuries and Savings Bonds section.
|Treasury Bills||Short-term securities that are non-interest bearing (zero-coupon) with maturities of only a few days (these are referred to as cash management bills), four weeks, 13 weeks, 26 weeks or 52 weeks. Also called T-bills, you buy them at a discount to face value (par) and are paid the face value when they mature. Interest income is subject to federal income tax, but exempt from state and local income taxes.|
|Treasury Notes||Fixed-principal securities issued with maturities of two, three, five, seven and 10 years. Sometimes called T-Notes, interest is paid semiannually, with the principal paid when the note matures. Interest income is subject to federal income tax, but exempt from state and local income taxes.|
|Treasury Bonds||Long-term, fixed-principal securities issued with a 30-year maturity. The Treasury Department stopped issuing Treasury bonds in October 2001, but brought back the 30-year bond in February 2006. Outstanding fixed-principal bonds have terms from 10 to 30 years. Interest is paid on a semiannual basis with the principal paid when the bond matures. Interest income is subject to federal income tax, but exempt from state and local income taxes.|
|You can learn more about Treasuries on the TreasuryDirect website.|
Treasuries Risk Report Card