Types of Bonds

Bonds are normally a very safe, sound, and promising investment. The returns are usually very good on the bonds though liquidating bonds takes a bit of time sometimes. There actually about four different types of bonds: Corporation bonds, State/local government bonds, federal government bonds and foreign government bonds.

One of the greatest pros of bonds is the guaranteed return of the original investment, thus making them the best way for those with low risk tolerance to invest. They are especially good for those who are new to investing. The U.S. Government uses the Treasury Department to issue Treasury Bonds for sales, and uses them to control the rate of inflation in the country. Treasury Bonds have varying amounts of time within which they attain their full value- anywhere from thirty years to just three months.

Since Treasury Bonds are issued by the Treasury Department, the U.S. government backs all of them. Tax is charged only on the profit that the bonds make those who hold them (i.e. the interest).Treasury Bond denominations include Treasury Bills (T-Bills for short), Treasury Notes (T- Notes) and Treasury Bonds. Corporate bonds contain quite a bit of risk attached to them, despite their high interest (and thus return) rates. They are sold to make up the debt that a company owes, which add to their nature of being risky. If the corporation goes bankrupt, the bondholder will find that the bonds have become worthless- and all their money no longer valuable.

Unlike the federal government, state/local governments can go bankrupt. Thus the bonds they offer can also become worthless, carrying a higher risk than that of federal bonds. However, the bankruptcy of a government is difficult to achieve since federal and neighboring state aid will usually only leave it with simply a deficit, that it covers one way or another. Furthermore, their bonds are free from all income taxes (even the profit, thus the interest is without deduction). Local taxes may also be waived.

A very risky move is investing in foreign bonds. Because of their very nature it may be difficult to collect on them, even (or especially since) most such purchases are done with a mutual group.The safest bonds are those of the U.S. government's. The interest is lower than that of all other types of bonds, but the risk is almost non-existent. Some people even reinvest mature bonds in more bonds, creating a cycle where they make so much interest that they just live off of the interest.