Types of Bonds
There are a variety of bonds to select from and discussing your goals, tax situation and risk tolerance with your J.P. Turner financial advisor will help identify appropriate bonds for you to consider adding to your investment portfolio. You and your advisor can review municipal, government and corporate bonds and mortgage-backed or asset-backed securities and international bond offerings to determine which are suited for your investment strategy and goals. Each bond market offers securities with different issuers, credit ratings, coupon rates, maturities, yields and other features. Each one also offers its own balance of risk and reward.
Government Bonds
Government securities fall into one of two categories: U.S. Treasury and Federal agencies. The U.S. Treasury issues bills, notes and bonds. They are one of the most liquid and widely held investments in the world. T-bills pay no current income, are issued at a discount to par and carry maturities of one year or less. Treasury notes and bonds pay current income and have maturities of one year to 10 years and 10 to 30 years respectively. Interest income is federally taxable but state tax exempt. Treasuries are not rated but are considered the highest quality debt security because interest and principal is guaranteed by the U.S. government.
Corporate Bonds
Offering higher yields than comparable Treasuries, corporate bonds will vary in return depending on their credit rating. Generally speaking, the higher the yield, the higher the risk. The high yield corporate market continues to be a source of funding for rapidly expanding industries such as cable and telecommunications and generally offers above-average total returns for investors. High-yield or "junk" bonds generally involve a greater degree of risk of default on interest and principal than do investment-grade bonds. Many corporate bonds have call features, provisions giving the issuer the right to call or redeem bonds before maturity. Call features can impact returns—negatively or positively—and need to be carefully evaluated before and during ownership. In addition, corporate bonds can also contain put provisions, an option giving the bondholder the right to sell the bond back to the issuer under certain conditions such as a change in ownership.
Four different yields are used to quantify returns on corporate bonds. Current yield is the income paid by the bond divided by market price. Yield to maturity is the annual return an investor would receive if the bond were held until maturity. Yield to call is the average annual return you would receive if your bond was called away before maturity. Finally, yield to worst is the lowest annual return an investor would receive under any potential call or maturity scenario.
Municipal Bonds
More commonly known as "munis," this type of bond is appealing to investors because the interest income earned is exempt from federal income tax and, in many cases, from state and local taxes as well. Like taxable bonds, maturity dates on municipal bonds range from very short—less than one year—to as long as thirty. Some munis have call provisions which give the issuer the right to call, or redeem, bonds before maturity. Call features can impact returns—positively or negatively—and need to be carefully analyzed before purchase. Munis are issued by states, counties, cities and other public agencies in order to fund projects that touch our daily lives, such as schools, highways, hospitals, sewer systems, housing and more. There are two different types of munis—general obligation bonds and revenue bonds.
General Obligation Bonds
This type of bond is sold to finance public improvements such as roads and schools. Because the interest and principal paid typically comes from the issuer's general tax fund and are voter approved they generally carry the highest credit ratings.
Revenue Bonds
Issued to finance public projects involving airports, hospitals and more, the income stream is generated by the project and, as a result, these bonds are considered riskier investments but but in general they pay higher interest rates than general obligation bonds.
Talk to your J.P. Turner financial advisor to determine if investing in bonds makes sense for you.
