Bond is a type of security that can be said to be somewhat of a loan. A loan is an amount that is borrowed from another party and paid back in full with or without interest. Bonds are similar to loans except that, they are issued by corporations, institutions (both government and private), military etc. Bonds are another means for an organization to raise money for its various plans.
Issuing bonds allows companies to raise money without going through banks and since bank loans are usually greater in interest compared to the bonds and as there is no limit to the amount of bonds that can be issued, it is often a judicious method to raise money, especially coupled with shares, which is then known as ‘equity’.
The first bond was issued by governments itself to raise money for wars and battles. Later on, the private organizations also started issuing bonds. A famous bond was that of the East India Company, which till date, holds significant value.
There are many different types of bonds out there in the market. Some of the prime types are discussed below:
- Municipal bonds: They are commonly referred to as ‘munis’. These bonds are offered by the cities during crisis times when the city has run out of cash. Although this situation is infrequent, it does occur occasionally and this is when the city issues munis. These are tax-free or in other words, their returns cannot be taxed, and they are a great investment since one has a prolonged maturity meaning that by the time the maturity is complete, the return shall be guaranteed.
- Corporate bonds: Bonds issued by large and small corporations are termed corporate bonds. Just like the government securities, corporate bonds also are hot commodities but the risks attached with corporate bonds means greater interest on the maturity. Besides, the maturity can range from short duration, 5 years, to long durations, over 12 years. The rate of interest depends on the maturity as well as the credit rating of the corporation. Better the name and rating, lower is the interest received by the receiver.
- Treasury bonds: They are also called T bonds. These bonds are exclusively issued by the US government. These debt securities are at fixed interest rates and mature generally after 10 years. They are regularly issued and are a hot pick for many investors since the return is almost guaranteed. Among all types of bonds, treasury bonds are the most stable and safe investment choice. Some T bonds come with a maturity of 30 years. The returns comes semi annually and are taxable under federal law.
- Fixed rate bonds: The coupon or the interest on the premium remains the same throughout the life of the fixed rate bonds or the maturity period of the bond.
Other than the above bond types, there are many more bond types that are traded in the market. The world of bonds is a vast and diverse one that requires less work than stocks but more work than taking a simple loan from the bank.