Kinds of Bonds

A bond is a debt security item similar to an IOU. An investor lends money to a company, and the company issues a bond to the investor in return. It may be necessary for the issuer to regularly pay interest to the investor or repay the debt by a certain date, depending on the repayment terms.

How are Bonds Classified?

There are three kinds of government bonds, distinguished by their maturity lengths:

1. Bills: less than one year
2. Notes: 1 to 10 years
3. Bonds: more than ten years

What Other Types of Bonds are There?

There are three other kinds of bonds you should be aware of.

These include:

• Municipal bonds
• Corporate bonds
• Zero coupon bonds

What are Municipal Bonds?

The risk level of these bonds is slightly higher than that of government bonds. Bonds issued by cities are tax-free. Due to tax savings, the yield is usually lower.

What are Corporate Bonds?

These are even riskier than municipal bonds. Companies issue them. As a result of the risk involved, these bonds tend to have much higher yields. This makes these bonds a good investment for an individual looking for a fixed income. The yield will depend upon the credit quality of the corporation.

There are a couple of variations on these types of bonds:

• Convertible bonds: Bonds that can be converted into stock
• Callable bonds: Allows a company to redeem an issue prior to maturity

What are Zero Coupon Bonds?

Bonds issued below par value are discounted bonds. When it matures, you will receive more than what you paid.

Why Should I Get a Bond Instead of Stocks?

Stocks can be a better investment, but the market is unpredictable in the short term. On the other hand, bonds can be a good investment for retirement purposes and the short-term in certain situations.

When Would a Bond Be a Good Short-Term Investment?

Investing in bonds can be a smart move for a student planning to attend graduate school who decides to work for a few years before enrolling. In the event that the student needs money soon, fixed income security, such as a bond, is a good option.

A bond makes sense in any situation where living on a fixed income would be more practical.

What Are Some Characteristics of Bonds?

A bond’s full value can be determined by knowing a few characteristics about it.

Among them are:

• Face Value/Par Value: The face value is the amount of money a bondholder will receive once the bond matures. Bonds are sold for their par value. The bond sells at a discount if its face value exceeds its par value. Bonds with a face value that is lower than the par value are called premium bonds.
• Coupon or the Interest Rate: This is the amount the bondholder will receive as interest payments. It is called the coupon because some bonds contain detachable coupons to tear off and redeem for interest.
• Maturity: The maturity date is the day when the bond is repaid. Maturities can range from one day to 30 years. One-year bonds are more predictable and less risky than 30-year bonds. The longer the maturity period, the higher the interest rate. Bonds with a longer term will also fluctuate more than bonds with a shorter term.
• Issuer: There are many factors to consider when determining what issuer to use, such as:
  • Default risk – Chance of debt being unpaid
  • Yield – The annual percentage rate for interest
  • Bond-rating system – Aid for determining a company’s credit risk

Are There Different Kinds of Bonds?

There are several kinds of bonds. Bonds can be classified under more than one category.

The following are some common bonds:

• War Bonds
• Municipal Bonds
• Retail Bonds
• Government Bonds
• Build America Bonds
• Junk Bonds

What Is a Corporate Bond?

Companies issue bonds to raise money for capital expenditures. Bonds can be used to finance operations or acquisitions of new companies. All types of businesses and major industry groups issue corporate bonds.

Bond investors lend money to companies so they can finance their future activities. As a result, the company agrees to pay interest on the principal.

What are Mortgage-Backed Securities?

A mortgage-backed security is a bond secured by a mortgage or a real estate loan. When a number of loans with similar characteristics are pooled together, mortgage-backed securities are created.

Banks serve as middlemen between homebuyers and investment firms through these bonds. Mortgage-backed securities are purchased by investors who lend money to homebuyers. A government-sponsored enterprise or a private financial company must issue mortgage-backed securities before they can be sold on the market.

Investment Funds

Investment funds, such as mutual funds, closed-end funds, and exchange-traded funds, pool money from investors and invest it according to a specific investment strategy. Investors can benefit from diversification and professional management through investment funds. Investment funds use many different investment strategies and styles.

Investment funds, however, can be riskier than other investments and investment strategies. Leverage and derivatives can be involved in investment funds.

What Is a Bond Lawyer?

When municipal bonds are issued, bond lawyers play a variety of roles. Municipal bonds include bonds, notes, revenue certificates, warrants, and other forms of debt issued by or on behalf of states. It is also possible for territories, possessions, political subdivisions, Native American tribes, and the District of Columbia to issue bonds. To practice law, bond attorneys must pass the state bar exam and have a Juris Doctorate. Bond lawyers typically work for government agencies or banks. A bond attorney is well-versed in tax and security law.

Bonds issued by municipalities include general obligation bonds and notes. Bonds and notes are backed by the full faith and credit of the issuer. Limited revenue sources are used to pay bonds, notes, and other obligations.

Federal, state, and local taxes may not apply to capital expenditures in a locality, such as an infrastructure construction or school funding. These bonds and notes are tax-exempt, making them attractive investment vehicles.

Bond attorneys investigate the bond’s intended purpose and research applicable laws accordingly. Lawyers also assist government agencies or banks in determining whether a bond issue is correct, complete, and properly structured.

Because bonds commit the full faith and credit of the issuer, which is payable from a limited number of municipal revenue sources, bondholders’ interests must be carefully considered. Bondholders’ interests must be protected by understanding legal and financial requirements. When a bond attorney represents a financial institution issuing a bond or note, this understanding is crucial to protecting the interests of the funding bank.

Bond attorneys may be responsible for the following:

• Helping state or local governments develop strategies for structuring bond offerings
• Attending or presiding over bond hearings
• Managing the documentation for bond issuances
• Verifying sales with the Securities and Exchange Commission (SEC)

Municipal bond lawyers should be experts in all aspects of municipal law. Bonds, notes, revenue certificates, warrants, and other forms of municipal debt may be issued by municipalities. States, territories, and possessions of the United States may issue these debts. Debt can also be issued by political subdivisions of the United States, Native American tribes, and the District of Columbia.

Bond attorneys raise funds to finance projects for governments and municipalities. It is the responsibility of bond attorneys to ensure that the bond issuance is legal and beneficial to the municipality.

Bond attorneys represent banks when they are providing funding for municipal projects and issuing bonds.

Within the past few years, the U.S. Bureau of Labor Statistics estimated the median salary for all bond attorneys to be $122,960. The projected job growth for all lawyers, including bond attorneys, is expected to be 4% between now and 2029.

Do I Need a Lawyer Experienced in Investments?

In the event of a dispute with your broker, such as when you lose a significant portion of your investment due to the broker’s bad advice, you should contact a lawyer right away.

An experienced investment lawyer or financial lawyer will help explain your rights as well as preserve any possible remedies you may have.