It’s Bond… the Bond Market.
Similar to stocks, bonds are a type of investment. However, instead of the investor receiving a percentage of the company's profit, a bond resembles a loan. The issuer of the bond will ask to borrow an amount of money for a certain period of time. If you agree to the terms, your return is the money you invested plus interest once the time period is over. The risk and maturity rate (the time period of the bond), determines the amount of yield (the return to an investor from the bond's interest payments). Bonds are given grades based on their credit quality or how risky the bond is. For the most part, the higher the rating, the safer it is, but also the lower the interest and potential earnings. Ratings range from ‘AAA’ for high-grade bonds with the highest likelihood of getting repaid to ‘D’ for ones that are not as likely to be repaid.
Types of Bonds
There are a spectrum of bonds, ranging from government to corporate. Bonds can differ in seller, buyer, risk, and purpose. Here are the main types of bonds:
U.S. Treasury Bonds: This type of government bond issues bills, notes, and bonds, by the U.S. Treasury Department for funding operations in the U.S. Federal Government. Treasury Bills have a maturity rate of 1 year, Treasury Notes have a maturity rate of 2-10 years, and Treasury Bonds have a maturity rate of over 10 years. These are known as the safest and one of the most popular types of bonds, as the yield is promised by the federal government. Consequently, this type of bond generally has a low return.
Agency Bonds: These are bonds issued by companies sponsored by the government, such as Fannie Mae and Freddie Mac, which are guaranteed by the government.
Municipal Bonds: These types of government bonds are issued by local governments or cities to raise money for the public good (fixing roads, building schools, etc). They are generally riskier than federal government bonds, but less risky than corporate bonds.
Corporate Bonds: These are bonds issued by companies for the purpose of increasing capital. If a company has a higher credit quality, it is able to issue bonds at a lower rate. Though they vary in risk, these are generally high-risk and high-reward investment options.
