Government Bonds, also called saving bonds, are considered the safest as the investment is backed by the U.S. Government. They can take the form of Treasury securities or securities of certain U.S. Agencies, such as The Government National Mortgage Association, called “Ginnie Maes”. The Treasury usually issues three types of bonds:

While the interest payment on muni bonds is fixed, the market price of a security changes as market conditions change. If you sell your municipal bond prior to maturity, you will receive the current market price, which may be more or less than the original price. If you sell a muni bond at a profit above their cost, the profit is fully taxable as a capital gain.

You can track the prices and interest rates of the best-known municipal bonds in the finance section of any major U.S. newspaper. You can buy them through dealers, banks and almost all brokerages, online and full-service. The minimum size of a municipal bond purchase is generally $5,000 of par value (face value).

There are three major types of bonds: government, municipal, and corporate. No matter the type, all bonds have a “face value” meaning the amount the issuer will repay to the buyer at the end of the bond’s life, which is known as “maturity date”; in addition to the face value bonds pay compensation to the owner either in regular interest payments, or discounted purchase price; the interest that a bond pays is called yield and it’s expressed as a percentage of the bond’s face value.

Government bonds are exempt from state and local taxes, and the interest earned can be tax-deferred until the bond is redeemed. The downside is that your money is tied up for five years, and there is a penalty if you redeem the bonds before that date (three most recent months’ interest).

A standard saving bond is Series EE Bond. EE Bonds issued after May 1, 2005 earn a fixed rate of interest. Electronic EE bonds are sold at face value and can be purchase for any amount of $25 or more, up to a maximum of $5,000 per year.

Paper EE bonds are sold at half their face value, meaning you pay say $25 for a $50 bond. The bond value increases over time with earned interest and it reaches face value when it matures.

Series I Bonds are different from the EE bonds only in how much interest they pay: the interest rate for these kind of bonds is indexed to the inflation rate.

The actual interest rate is set by a fixed rate that lasts the life of the bond, plus a semi-annual inflation rate on top of that. The inflation rate is determined once in May and again in November.

The two most common types of municipal bonds are general obligation and revenue bonds. Both are exempt from federal, state and local taxes -- as long as you live in the issuing municipality. What's more, they're longer-term bonds, which take anywhere from one to 38 years to mature.

Corporate Bonds, issued by corporations of course, usually pay a higher interest rate, but this interest is not tax free. The maturities of most corporate bonds varies from five to twenty years, but in some cases they can be as short as three months.

Although bonds are less volatile investment than stocks, they are not totally safe as their value can rise and fall with market forces.

Secured bonds are bonds backed by collateral. If the bond issuer defaults, the secured debt holder has first claim to the posted collateral.

Unsecured bonds are not backed by any specific collateral. In the event of a default, bond holders will need to recover their investment from the issuer. Unsecured debt will generally offer a higher interest rate than those offered by secured debt due to a higher level of risk.

Some bonds, such as senior bonds, have priority in making claims over those who hold subordinated bonds; a subordinated bond will typically offer a higher interest rate due to the higher level of risk.

Most bonds may be purchased in $1,000 increments and the principle returned is $1,000. Before maturity, the price of a bond is likely to fluctuate depending on current interest rates, inflation, any change in the bond rating, and the length of maturity. Bonds are usually resold before they mature, or reach the end of the loan period. This is how bonds rise and fall in value. Since bonds return a fixed interest payment, they tend to look more attractive when the economy and stocks market decline. When the stock market is doing well, investors are less interested in purchasing bonds, and their value drops.

You can use the knowledge of an experienced broker to help you buy corporate bonds.

You can look to the New York Stock Exchange (NYSE) for corporate bonds to purchase. They are listed in most newspapers, several magazines and online at the NYSE's website. The site offers information on the bond's history, which is essential in making a purchase decision. The NYSE offers auction twice a day where buyers can snag bonds at a discount. Many investors use the NYSE information as a research tool, but do their trades with a trusted broker either online or off.

Or you can contact your bank, mutual fund, or 401K provider. Many of the major banking firms also offer services that allow their clients to trade bonds. You can also request a corporate bond as a part of your 401K or mutual fund portfolio.

Bonds should be considered for most investment portfolios and they are a fine vehicle for the conservative investor.

The safer and more successful investment where bonds are concerned is a portfolio of various bonds, or a bond mutual fund or investment trust, which offer several municipal or corporate bonds with various interest rates and various maturities.


Stay tuned for our next “Securities” episode!

Municipal Bonds are issued by states, counties, cities, agencies, authorities, city utilities, ports, harbors, airports, and so on. Their particular feature, other than being of low risk too, is that the investor does not pay federal income taxes on the interest received; also some municipal bonds offer interest free of state income taxes. Because of this feature, municipal bonds have slightly lower interest rates, but are attractive to investors in higher tax brackets.