2.8:
Types of Bonds
Bonds are of various types to meet the needs of investors and the financial requirements of the industry.
Government bonds, such as United States Treasury Bonds, are issued by governments to fund public spending and are low-risk due to government backing.
Municipal bonds, like those issued by California Municipality, finance local projects offering tax benefits.
Corporate bonds like those issued by corporations like IBM help companies raise capital for expansion, offering higher returns with credit risks.
Green bonds issued by companies like Tesla are used to finance environmentally beneficial projects to target sustainable investment practices.
Convertible bonds like those issued by Airbnb allow investors to convert bonds into stock, combining fixed income with equity gains.
Floating-rate bonds, such as those issued by ExxonMobil, adjust interest rates based on market benchmarks, offering protection against interest rate fluctuations.
Zero-coupon bonds, like those issued by Amazon, lack interest payments but are sold at a discount, providing fixed returns at maturity.
These bonds demonstrate the different financial tools available, catering to different investors.
2.8 Types of Bonds
While exploring the types of bonds, investors are presented with diverse choices, each with unique attributes tailored to different investment objectives. This variety empowers investors, allowing them to control their investment decisions confidently.
Government-affiliated organizations issue agency bonds to fund activities like mortgage lending. They aren't fully guaranteed by the government but still carry a strong backing, resulting in a risk profile slightly higher than that of Treasury bonds.
In addition, investors can choose from zero-coupon bonds, which don't pay periodic interest but are purchased at a deep discount, maturing at par value, inflation-linked bonds such as the U.S. TIPS, which protect the investor from inflation by adjusting the principal based on changes in the consumer price index, and foreign bonds, issued by foreign governments or companies, which bring currency risk into the equation but can offer diversification benefits.
Each bond type, with its specific risk profiles, maturities, and tax considerations, offers a unique opportunity for investors to shape their bond portfolios. This flexibility not only caters to their personal investment strategy and appetite for risk, but also empowers them, putting them in the driver's seat of their financial future.