Types of Bonds

Government Bonds
To fund government programs, meet its payrolls, and essentially pay its bills, the U.S. Government issues its own bonds from the Treasury (T-bills and T-Notes) and from several government agencies. Because these bonds are backed by the government, they pay a fixed amount of interest and are, therefore, virtually risk free. Government bonds mature in one to 50 years. In some cases, you don't have to pay state or local income taxes on the interest they earn.

Corporate Bonds
Corporate bonds are issued by businesses to help them pay expenses. While corporate bonds are a higher risk than government bonds, they can earn a lot more money. There is also a much larger selection of corporate bonds. You do have to pay federal income tax on the interest they earn.

Municipal bonds
Municipal bonds (also called "munis") are issued by states, cities, counties and various districts to raise money to finance operations or to pay for projects. They finance things like hospitals, schools, power plants, streets, office buildings, airports, bridges, etc. Municipalities usually issue bonds when they need more money than they collect through taxes (for example, when they overspend). It's sort of like having a bake sale.

The good thing about municipal bonds is that you don't have to pay federal income taxes on the interest they earn. Many are also free from state and local taxes in the state in which they are issued. Municipal bonds may be secured or unsecured. To be secured means to be backed by collateral, like revenue bonds. To be unsecured is to be without collateral.

Still unsure about some of the terms related to bond investment? Check out the glossary on the next page.