What are the different types of bonds?

Different bond types—government, corporate, or municipal—have unique characteristics influencing their risk and return profile. Understanding how they differ and the relationship between the prices of bond securities and market interest rates is crucial before investing.

What is an example of an investment grade bond?

An example of a simple, investment grade bond is a US treasury bill. They have an interest rate determined by the standard interest rate issued by the Federal Reserve and maturities of five years or less. Government bonds tend to have relatively low interest rates in exchange for their safety, while corporate bonds may be more variable.

How does a bond work?

Let’s look at an example of how a bond works: Company XYZ issues a 10-year bond with a face value of $10,000 and a coupon rate of 5%. The investor agrees to buy that bond under the conditions that the company will pay $500 each year (in interest) over a 10-year period. At the end of those 10 years, the company will repay the investor $10,000.