Types of Bonds
A bond is actually a form of debt that a business must pay back over a specific period of time and a certain interest rate. Sometimes you’ll here them referred to as notes or debentures. Corporate bonds are issued by companies of all sizes. Bond holders however are not owners of the corporation. If the company is in financial trouble and needs to be dissolved, bondholders are paid off in full before stock holders are. If the company defaults on a bond payment, any bond holder can go to bankruptcy court and request the corporation be placed in bankruptcy.
Municipal bonds are issued by cities, states and other local agencies. Some municipal bonds are backed by the taxing authority of the state or town, while others rely on earning income to pay the bond interest and principal. Municipal bonds are not taxable by the federal government and so don’t have to pay as much interest as equivalent corporate bonds.
U.S. Bonds are issued by the Treasury Department and other government agencies. They are considered to be safer than corporate bonds, so they pay less interest than similar term corporate bonds. Treasury bonds are not taxable by the state and some states do not tax bonds of other government agencies. Shorter term Treasury bonds are called notes and much shorter term bonds (a year or less) are called bills which have different minimum purchase amounts.