Bond Essay

6985 WordsJul 31, 201428 Pages
What is a Bond? A bond is essentially a loan an investor makes to the bonds’ issuer. That issuer can be the federal government (as in the case of Treasury bonds) or a local government (municipal bonds), government-sponsored enterprises (like Fannie Mae), companies (corporate bonds) or even foreign governments or international corporations. The investor, or bond buyer, generally receives regular interest payments on the loan until the bond matures or is “called,” at which point the issuer repays you the principal. Bond funds pool money from many investors to buy individual bonds according to the fund’s investment objective. Most bonds pay regular interest until the bond matures. Callable bonds allow the issuer to repay the bond before maturity. Zero-coupon bonds offer a deep discount and pay all the accumulated interest at maturity. Who issues bonds? Governments, government sponsored enterprises and corporations issue bonds to raise money for their endeavors. The financial health of the issuer determines how highly (or not) the bonds are rated; higher rated bonds are considered to be safer and therefore pay less interest, whereas lower-rated bonds pay higher interest rates to compensate investors for taking on more perceived risk. An issuer’s credit rating can change in either direction over time. In addition to the ratings and interest payments, the institution issuing the bonds can also determine whether or not the income is taxable. A roundup of the types of bonds and information on their issuers follows: Treasury bonds The U.S. Treasury issues bonds to pay for government activities and service the national debt. Treasuries are considered to be extremely low-risk if held to maturity, since they are backed by “the full faith and credit” of the U.S. government. Because of their safety, they tend to offer lower yields than other bonds. Income from Treasury bonds is

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