Bonds-The Basics

First, it is important to understand a bit of background information regarding bonds. Just like almost anyone else, large corporation and even governments feel the need from time to time to borrow money. While the common person can normally go and visit their local banker in order to borrow the needed funds, the process of borrowing funds does not quite work the same for such organisations and governments.

Bonds are used as a way for governments and large organisations to borrow the funds they need to expand and finance a variety of operations. In this regard, bonds are a type of debt that is sold to the public. It is sold in increments which are set. Typically, they are set in the area of around £1000. 

When you purchase the bond you receive a document that states how much money you leant and information regarding the interest rate which is agreed upon. The document will also state how often the interest will be paid and the length of the loan. Because the interest rate on bond repayment is fixed bonds are known as a fixed income security.

It is also important to understand that there is more than one type of bond. There are basically four different types of bonds. These include government bonds, government agency bonds, corporate bonds and state and local government bonds.

U.S. Government bonds are commonly referred to as Treasuries because they are actually issued or sold by the Treasury Department. These bonds come in various lengths of time until they mature. These maturity rates vary from three months to thirty years. There are many different types of Treasuries which include Treasury bills, Treasury notes, inflation-indexed notes and Treasury bonds.

Bonds may also be issued by other government agencies such as the Federal National Mortgage Association and the Government National Mortgage. These bonds are usually sold for specific purposes like funding home ownership.

A company can also sell debt through a public security market such as a corporate bond. Generally, a corporate bond will carry a higher interest rate than government bonds because there is a higher risk involved. The company could conceivably go bankrupt and then default on the bond. In some cases, a corporate bond may be known as a convertible bond if it can be converted into stock under certain provisions.

Finally, state and local government bonds are offered as a way for a government to raise funds. These bonds are free from federal income tax on the interest paid. State and local income taxes on the bonds can also be waived.