Types of Bonds: Treasury, Agency, Municipal, Corporate & High-Yield Explained

 What is a Bond?

A bond is a debt instrument issued for a period of more than one year with the purpose of raising capital through borrowing. Bonds can be issued by the federal government, states, cities, corporations, and other institutions. Essentially, a bond represents a promise to repay the principal amount along with interest (coupons) on a specified date (maturity).

Some bonds may not pay periodic interest, but all bonds require repayment of the principal. When an investor buys a bond, they become a creditor of the issuer but do not acquire any ownership rights, unlike shareholders. Bondholders generally have a higher claim on the issuer’s income than shareholders in the event of financial distress, as is the case for all creditors.

Bonds are classified in several ways, including tax status, credit quality, issuer type, maturity, and secured versus unsecured. For example, U.S. Treasury bonds are considered among the safest unsecured bonds, as the likelihood of default is extremely low.

The yield from a bond typically comes from three sources:

1. Coupon interest
2. Capital gains
3. Interest on reinvested interest (if applicable)

Bonds can be sold above or below par value, but the market price usually approaches the par value as the bond nears maturity. Riskier bonds generally offer higher returns to compensate for the added risk. Some bonds, such as those issued by municipal or state governments, may be tax-exempt, meaning the interest payments are not subject to federal income tax, and sometimes state or local taxes as well.

Definition of a Bond

A bond is a debt investment in which an investor loans money to an entity (corporate or governmental) for a defined period at a fixed or variable interest rate. Bonds are commonly referred to as fixed-income securities and are one of the three main asset classes, alongside stocks and cash equivalents.

In simpler terms:

1. A bond is a written and signed promise to pay a specified sum of money at a future date.
2. It represents a loan from the investor to the issuer with a defined interest rate (coupon).
3. Bondholders earn returns through interest payments and/or capital gains but do not have ownership rights in the issuing entity.

Types of Bonds

1. U.S. Treasury Bonds – Direct debt obligations issued by the U.S. government. The government uses the proceeds to raise capital and/or make payments on existing debt. Treasury bonds are considered very low-risk since they are backed by the full faith and credit of the U.S. government.
2. Agency Bonds – Debt obligations issued by federal agencies or government-sponsored enterprises (GSEs). These entities are federally chartered but may be publicly owned by stockholders. Agency bonds typically carry slightly higher risk than Treasury bonds.
3. Municipal Bonds – Issued by states, cities, counties, and other public entities to fund public projects such as schools, hospitals, highways, sewers, and universities. Interest earned on many municipal bonds is often tax-exempt at the federal and sometimes state level.
4. Corporate Bonds – Debt securities issued by corporations to fund capital improvements, expansions, acquisitions, or debt refinancing. Corporate bonds are fully taxable and typically carry higher yields than government bonds to compensate for increased risk.
5. High-Yield Bonds – Also known as junk bonds, these are debt securities rated below investment grade due to the issuer’s weaker ability to repay interest and principal. High-yield bonds offer higher interest rates to attract investors willing to take on the additional risk.

Type of Bond	Issuer	Purpose / Use	Risk / Features
U.S. Treasury	U.S. Government	Raise capital / pay existing debt	Very low risk, backed by full faith of U.S. government
Agency	Federal agencies / GSEs	Fund agency programs	Slightly higher risk than Treasuries, sometimes publicly owned
Municipal	States, cities, counties, public entities	Fund public projects (schools, hospitals, highways)	Often tax-exempt, moderate risk
Corporate	Corporations	Fund expansions, acquisitions, capital improvements	Fully taxable, higher yield than government bonds
High-Yield	Corporations (below investment grade)	Attract investors despite higher default risk	High risk, high return (junk bonds)

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