Different types of bonds explained
Government, corporate bonds, muni, and zero coupon bonds… which one is best for you? Read on and find out.
15:41 04 February 2013
Bonds can be a little tricky for first time investors. To make it less confusing, let me explain the four main types of bonds. You can then decide which one is best for you.
Government bonds
As the name implies, these are the bonds issued by the government; they are also often called treasuries. This type of bond pays investors interest every year until the maturity date when the capital is given back to the investors.
Municipal bonds
The great thing about municipal bonds is that the interest earned is not taxed. These bonds are issued by local municipal government to pay for road and service support, school, and other improvements.
Zero coupon bonds
These bonds do not offer yearly interest payouts instead investors pay a decreased price now for a bigger lump sum payout on the maturity date. For example, investors who bought £800, may get £1,200 in 5 or 10 years.
Corporate bonds
These ones are issued by corporations and they typically offer higher coupon rates compared to government and municipal bonds. Why? It’s because there is a risk that the company will get bankrupt.