Bonds can help you manage market fluctuations and generate income as part of a diversified portfolio. Bonds typically fall into the following categories.
These are a way for companies to raise capital to run their business. They tend to be more risky because they are backed by the full faith and credit of the individual corporations that issue them and not by the government, therefore, they tend to pay a higher rate than government bonds of comparable maturities.
Mortgage backed securities
A mortgage-backed security is a security created by pooling individual mortgages and selling it as individual bond securities. Principal and interest are proportionately paid back to the investor and typically carry a higher risk than other bonds with the amount of principal payments being influenced by refinancing of mortgages. Mortgaged-backed securities are guaranteed by the U.S. government as to the timely payment of principal and interest, however this guarantee does not apply to the yield, nor does it protect against loss of principal if the bonds are sold prior to the payment of all underlying mortgages.
State and local governments issue municipal bonds to pay for projects such as turnpikes, dams or highways. These type bonds typically pay interest free from federal and/or state income tax, therefore, typically receiving lower interest rates than others. Interest income may be subject to the alternative minimum tax.
u.s. government securities
These are issued by the U.S. Department of Treasury and obligate the government to pay the bondholder interest at designated time frames and repay the principal at the stated maturity date.
Government bonds and Treasury bills are guaranteed by the US government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value.
Are issued by United States agencies and are generally thought to be very safe investments in terms of default risk. Examples of well known agencies that issue bonds are Federal Home Loan Mortgage Corporation (FHLMC or "Freddie Mac"), Federal National Mortgage Association (FNMA or "Fannie Mae"), and the Federal Home Loan Bank.
Include debt issued by foreign governments and international corporations. In addition to credit and interest rate risk, these securities also have market value risk due to fluctuations in foreign exchange rates.
*International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors Selling bonds prior to maturity may make the actual yield differ from their advertised yield and may involve a loss or gain.
Bond values will decline as interest rates rise and are subject to availability and change in price.