Bond index fund definition

Choosing Between Different Bond Types

Different bond types offer different benefits to an investor's portfolio. As with stock investing, investors need to diversify their bond portfolios. In order to diversify a bond portfolio, different bond types are needed. There are two main ways to classify bonds into different bond types; the first way is by the the type of issuer that issues the bond and the second is by the characteristics of the bond itself such as interest rates and maturity dates. Below are the most common types of bonds.

A corporate bond is a type of bond that is issued by a corporation, rather than a government, an agency or other types of issuers. Again, a corporation can issue bonds with different characteristics which some investors may refer to as different bond types. Corporate bonds are often more risky than bonds issued by the US government and municipal bonds. When investing in bonds you need to pay attention to the bond ratings.

If safety is your primary concern, then investing in US treasury issues is the way to go. US Treasury issues are backed by the full faith and credit of the US government. There are a few different bond types issued by the US government such as T-bills, T-bonds, and T-notes. T-bills are short for Treasury bills, T-bonds for Treasury bonds and T-notes for Treasury notes. T-bills have the shortest maturity dates and are good for short term investments if yield is not the investor's primary objective.

Agency bonds are also relatively safe. Agency bonds may not be as safe as the US government bonds since they are issued by agencies related to the government. Different bond types issued by agencies may or may not have the full backing of the US government. Some agency bonds are riskier than others. Examples of agency bonds are bonds issued by Fannie Mae and Freddie Mac.

Many investors buy bonds, not because of safety and regular income but also the tax benefits some types of bonds can offer. Municipal bonds or munis for short are bonds issued by states, local governments, counties, townships, cities, and other municipalities. Municipal bonds are issued to finance projects such as building a bridge and building a road. Different bond types are issued based on the needs of the municipal issuer.

Investing in different bond types will enable investors to lower their risk and increasing their returns. By having not only bonds by different issuers but also bonds with different terms, maturity dates, different interest rates and interest payment schedule as well as different risk levels, investors can smooth out the fluctuations of their bond portfolio. There are many different bond types to choose from and there are many tools to help investors choose among them.

For more information about the Different Bond Types and their individual strengths and weaknesses, click over to the Corporate Bonds information website today.