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Overview: Investment Types Continued Beyond the Basics - Bonds We have previously defined a bond as a loan to the issuer or an IOU to the investor. Now, let’s take a closer look at the different types of bonds and the risks associated with investing in bonds. The maturity date of a bond is the date on which the bond issuer has agreed to repay the loan and the interest. Types of Bonds U.S. GOVERNMENT BONDS - Bonds issued by the U.S. government are called Treasuries. They are grouped in three categories. U.S. Treasury bills -- maturities from 90 days to one year U.S. Treasury notes -- maturities from two to 10 years U.S. Treasury bonds -- maturities from 10 to 30 years Treasuries are widely regarded as the safest bond investments, because they are backed by "the full faith and credit" of the U.S. government. MUNICIPAL BONDS - Municipal bonds are issued by state, county or city governments to raise capital. Their interest is generally exempt from federal taxes, and also from state taxes for residents of the state in which they are issued. CORPORATE BONDS - Corporate bonds represent debt of corporations. The interest paid on the bonds is fully taxable. Corporate bonds are issued in maturities ranging from less than one year to about 30 years (although there are a few corporate bonds that mature in more than 30 years). They typically pay interest twice a year. The investment risks associated with corporate bonds may be greater for smaller, weaker companies. INTEREST RATES AND BOND PRICES - An important aspect associated with bond investing is what is known as the inverse relationship between interest rates and bond prices. When interest rates rise, outstanding bond prices fall, and when interest rates fall, outstanding bond prices rise. For example: A bond that paid 6% interest would be more valuable when interest rates drop, because 6% bonds issued after an interest rate drop of 1% would only pay 5%. Keep in mind that the opposite is true when interest rates rise by 1%. The bond that paid 6% would now pay 5% and bonds issued after an interest rate increase would pay 7%. Therefore, the value of the 6% bond decreased. Investing in higher-yielding, lower-rated bonds has a greater risk of price fluctuation and loss of principal and income than investing in U.S. government securities such as U.S. Treasury bonds and bills. Treasuries are guaranteed by the government for repayment of principal and interest if held to maturity. Investors should carefully assess the risk associated with an investment in the fund. < BACK NEXT > #40131