Education / Bond market/ Types of bonds

Most people will be surprised, but at close quarters the bond market offers investors a lot more choices than the stock market. Depending investors' goals, tax situation and risk tolerance, one can choose from municipal, government, corporate, mortgage-backed or asset-backed securities and international bonds. Within each broad bond market sector you will find securities with different issuers, credit ratings, coupon rates, maturities, yields and other features. Each one offers its own balance of risk and reward.

The Bond Market Association classifies the broader bond market into specific bond markets according to the issue of a security. . Corporate . Government & Agency . Municipal . Mortgage Backed, Asset Backed . Bond funds

U.S. Government Bonds
The bonds issued by U.S. Government are called Treasurys. They're grouped in three categories. Treasury bills - maturities from 90 days to one year Treasury notes - maturities from two to 10 years Treasury bonds - maturities from 10 to 30 years

Treasurys are widely regarded as the safest bond investments, because they are backed by "the full faith and credit" of the U.S. government. Compared to other types of bonds, however, even that 30-year Treasury is considered safe. And there's another benefit to Treasurys: The earned income is exempt from state and local taxes.

Municipal Bonds (mini bind, munis)
Municipal bonds are a step up on the risk scale from Treasurys, but they make up for it in tax trickery. Municipal bonds may be general obligations of the issuer or secured by specified revenues. Interest income received by holders of municipal bonds is often exempt from the federal income tax and from the income tax of the state in which they are issued, although municipal bonds issued for certain purposes may not be tax exempt.

Corporate Bonds
Corporate bonds are generally the riskiest fixed-income securities (although this risk depends, of course, upon the particular corporations, the current market conditions and governments being compared), because even large companies are much more sensible than governments to economic problems, mismanagement and competition. On the other hand, corporate bonds can also be the most lucrative fixed-income investment, since you are generally rewarded for the extra risk.

Corporates can be of three main maturity ranges: Short term: 1 to 5 years Intermediate term: 5 to 15 years Long term: longer than 15 years

Corporate bonds are often listed on major exchanges (such bonds being described as "listed" bonds) and ECNs, and the coupon (i.e. interest payment) is usually taxable. However, despite being listed on exchanges, the vast majority of trading volume in corporate bonds takes place in decentralized, dealer-based, over-the-counter markets.

Mortgage-backed securities (MBS) and asset-backed securities (ABS) represent the largest segment of the global bond market today. In simple terms, investing in MBS means lending your money to hundreds of individual mortgage borrowers across the country. In return for a higher yield than US Treasury notes, investors are subject to added "prepayment" risk, meaning money invested may be repaid much sooner than maturity.

Agency MBS are mortgage bonds which are guaranteed by a government agency or government-sponsored enterprise such as Fannie Mae or Freddie Mac. Non Agency MBS are mortgage bonds which are issued by banks and financial companies not associated with a government agency. These securities have no credit guarantee other than the quality of the loans behind them, and any other structural credit protection.

Asset Backed Securities
Bonds that represent an investment in a pool of consumer or commercial loans. For example, auto loans or credit card loans are commonly pooled to make asset backed securities. For unknown historical reasons, bonds backed by high quality mortgage loans are considered Mortgage Backed Securities (MBS) despite the fact that technically they fall into the broader definition of Asset Backed Securities (ABS). Bonds backed by home equity loans and other home loans less than high quality are considered Asset Backed Securities.

Bond Funds
"Bond fund" and "income fund" are terms used to describe a type of investment company (mutual fund, closed-end fund, or Unit Investment Trust (UIT)) that invests primarily in bonds or other types of debt securities. Depending on its investment objectives and policies, a bond fund may concentrate its investments in a particular type of bond or debt security-such as government bonds, municipal bonds, corporate bonds, convertible bonds, mortgage-backed securities, zero-coupon bonds-or a mixture of types. The securities that bond funds hold will vary in terms of risk, return, duration, volatility, and other features.