Bond Types published by Legal Docs Online

There are many different kinds of bonds out there. Although they all have many similarities, they also have many elements that make them unique, and should you consider investing in bonds you should know the different kinds of investment options available and the level of risk and potential return on investments involved. Below is a breakdown of five of the most popular bond options available.

Junk bonds are bonds that the experts believe have a greater than average chance of being defaulted on. Also commonly known as high yield bonds they pay higher yields to bondholders because the borrowers have a poor credit rating.

Junk bonds have a bad reputation because back in the '80s, junk bonds were invented to enable smaller companies or big investors to use bonds and bond markets to finance and plan takeovers of large corporations, also in fact a famous study completed in1989 showed that 34% of junk bonds default.

They pay a higher yield simply because the risk is greater, and also the potential reward is greater as well, sometimes as high as 50% more. A risky investment unless you are bond savvy and able to take chances with your investment dollars.

A corporate bond simply put is a bond issued by a corporation. The term is usually applied to longer-term debt instruments, generally with a maturity date falling at least a year after their issue date. Sometimes, the term "corporate bonds" is used to include all bonds except those issued by governments in their own currencies.

Strictly speaking, however, it only applies to those issued by corporations. And corporate bonds are often listed on major exchanges and some corporate bonds have an embedded call option that allows the issuer to redeem the debt before its maturity date. A pretty safe long term investment option.

Treasury Bonds are government bonds issued by the United States Treasury Department through the Bureau of the Public Debt. They are the debt financing instruments of the U.S. Federal government, and are often referred to simply as Treasuries.

There are four types of treasury securities: Treasury bills, Treasury notes, Treasury bonds, and Savings bonds. All of the Treasury securities, with the exception of savings bonds are very fluid and are heavily traded on the secondary market. A low risk, but low gain solid investment option.

Municipal bonds, also known as munis, are debt securities issues by states and local governments looking to raise money to build new roads, schools or to pay for other programs. The interest paid to investors over the course of the muni is tax free at the federal level.

And, if the investor resides in the city or state that issued the debt, state and local taxes are normally waived as well. However, if you sell the muni for a profit, the capital gains from the sale are taxable. A low risk investment with tax advantages.

International bonds come in the same general types as those of U.S. issuers. Most foreign governments have a finance department similar to the U.S. Treasury that issues bonds.

These government bonds, sometimes known as sovereign bonds, are similar to any other bond; they pay interest at regular intervals, and at maturity, they pay the principal amount back to the owner. Most of these bonds are issued in the currency used by the country that distributes them.

Just as with American bond funds, there are risks. A rise in interest rates will bring down the price of an international bond fund. And a drop in the value of the foreign currency can also affect international funds. Some international bond funds can have returns as high as 14 percent or better.