In finance, a bond is a debt security, in which the authorized issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay interest (the coupon) and/or to repay the principal at a later date, termed maturity. A bond is a formal contract to repay borrowed money with interest at fixed intervals.
Bonds are a long-term investment strategy, which are often purchased to help to diversify a portfolio. As with any diversified portfolio, it is vital that the bonds purchased also have diverse characteristics. It is not a good idea to risk all assets in a single bond class or investment. When considering the various types of bond strategies, tax deferred bonds are a good place to begin for those new to the bond market.
Governments, corporations and mortgage companies issue bond securities as a way to borrow money. The bond is the promise from the borrower that he will pay back the loan at a specific rate and maturity date. Investors and brokers refer to bonds by various names; the most common are bills, notes, and debt securities.
Municipal Bonds
Municipal bonds are tax deferred. They are issued by cities, counties, school districts and other government agencies at the state level to finance public projects such as airports, education and transportation. Depending in how the bond is issued by the municipality, some are completely tax exempt, while other bonds are tax deferred until their maturity date.
Treasury Bonds
Federal treasury bonds are long-term bonds that pay investors interest every 6 months until their maturity date. When the bond reaches maturity, the federal government pays the investor the face value of the bond. Treasury bonds can be structured to be tax deferred.
Savings Bonds
Savings bonds are an excellent place to begin investing in bonds. The taxing of savings bonds is deferred until final maturity or redemption. Series EE Bonds are an excellent way to save for a child’s education because the government offers special tax advantages under the Education Savings Bond Program. Investors must have a social security number in order to own savings bonds.
How to Buy
Municipal and treasury bonds are sold by investment banks, brokers and online brokerage companies. To purchase savings bonds and to get more information on federal government bonds in general, visit The Bureau of Public Debt (see Resources).
Why Buy Government Bonds?
Choosing to buy federal, state and municipal bonds is an affective way to protect against losses in any particular market sector. By choosing bonds of different maturities, investors can manage the interest rate risks involved in buying longer-term bonds. These risks happen when bondholders own a low-interest bond during a period of inflationary growth.