Types Of Bond Issuers
Bonds are broken into four main types, based on the bond issuer:
- Corporates (aka: Corporate Bonds): Corporate bond certificates are very different from common stock certificates. With a stock, you are an “owner”. If the company makes money (profits) you might get a higher dividend or higher stock price. Bondholders do not share in these profits or the company’s growth. They can only expect repayment of the principal bond amount and the fixed annual interest payment for the length of the bond. If the company goes bankrupt or fails, bondholders and owners of preferred stock must be paid in full before the common shareholders get any money. Therefore bonds and preferred stocks are known as "senior securities".
- State and local governments or their agencies (aka: Municipal Bonds or Munis): These bonds support State and local government needs or special projects.
- The benefit of municipal bonds is their exemption from federal income taxes. Further, if you live in the state of issue, they are usually exempt from state and local taxes as well. Because of this tax exemption, municipal bonds have interest rates several percentage points below corporate bonds. Munis are very advantageous as your income grows and you are in a higher tax bracket.
- Municipals are issued in $5,000 amounts, compared to corporate bonds which have a $1,000 investment. However prices are nonetheless quoted as if the principal amount was $1,000.
- 1900 Municipals are traded over-the-counter Stock Market & Security Exchanges. You must consult a bond dealer for a price.
- Some of these bonds also carry Municipal Bond Insurance. Make sure you know if the bond is insured, and the tax status of the municipal bond you buy. There are several types of municipal bonds, but two major categories
- General Obligation Bonds: are considered safer since they are backed by the full faith of the government (and taxing powers), although some states or municipalities are more financially sound than others. Because of their greater security, they usually have lower interest rates.
- Revenue Bonds: are riskier. These are bonds for specific public works projects, such as a bridge. The revenue collected, in the case of the bridge (tolls), from the project would be used to pay the bondholders. Revenue bonds issued for private institutions such as hospitals are even more risky. Generally these bondholders do not have any claims on any of the community’s other resources.
- You can get information and statements from the municipality issuing bonds from the Municipal Securities Rulemaking Board’s Electronic Municipal Access (EMMA) site: http://enmma.msrb.org . You can also obtain information from your bank or stock broker.
- United States and Foreign Government (aka: Government Bonds)
- U.S. Government Bonds …U.S Treasury Securities: (see our section under Savings) since these bonds are backed by the “full faith and credit” of the U.S. government. Governments issue different types of securities based on maturity. Treasury Bills (up to and including one year); Treasury Notes (one to seven years); and U.S. Government Bonds (seven to 30 years). Government securities offer:
- Maximum security (people don’t believe the U.S. government will go bankrupt).
- Competitive yields—although riskier corporate bonds will have a higher yield, they will be less secure.
- Ability to convert the bonds to cash easily (high degree of liquidity) since they are actively traded.
- Limited taxation, since they are free of state and local taxes (but you do pay federal taxes).
- See our section under U.S. Treasury Offering, under Investments. You can also go to http://www.treasurydirect.gov.
- Foreign Governments: Other countries also issue bonds. Some people believe in investing overseas when the U.S. economy and/or dollar weakens. However, these bonds are considered riskier investments because of instability in international currencies or governments.
- Federal Agencies (aka: Agency Bonds): These are bonds issued by the U.S. government-sponsored agencies. They are backed by the U.S. government but not guaranteed by it. Some of the well known issuers are: Student Loan Marketing Association (Sallie Mae – primary lender for student loans); Federal National Mortgage Association (Fannie Mae), and Federal Home Loan Mortgage Association (Freddie Mac) which helps first time home buyers. Agency bonds are usually exempt, which means you don’t have to pay state and local taxes, but you still have to pay federal Taxes.