Common types of debt securities available to the average investor include U.S. Treasury securities, corporate bonds and municipal bonds. Debt securities are a debt instrument investment asset with basic terms spelled out, including the principal amount, interest rate, interest payment schedule and the maturity date. Debt securities can be accessed through the open market, bond dealers, brokerage firms, mutual funds, exchange-traded funds (ETFs), or by direct purchase from the entity issuing the bond.

U.S. Treasury Securities

U.S. Treasury securities, backed by "the full faith and credit" of the U.S. government, are commonly considered as having virtually no credit risk. In fact, the rate of return on Treasury securities is often referred to as the "risk-free rate of return." However, precisely because the risk with government bonds is so low, these bonds usually pay lower interest than any other type of bond. The market for U.S. Treasury bills (T-bills), notes and bonds is one of the largest and most liquid financial markets. Some Treasury securities, such as U.S. savings bonds, are not traded on the open market but only purchased and redeemed from the government.

Government Bonds

There are other government bonds besides Treasury securities. These include government agency bonds and government-sponsored enterprise (GSE) bonds. GSEs are entities for financing created to serve specified groups of borrowers, such as students or homeowners. Among the most widely held GSE bonds are those issued by Fannie Mae, Freddie Mac and the Tennessee Valley Authority (TVA).

Corporate Bonds

Corporate bonds are popular income investing assets because they typically pay higher yields than government securities, although they also carry correspondingly higher risk. Corporations issue bonds to finance growth and operations, or sometimes simply to retire other debt. Corporate bonds can commonly be purchased in amounts of $1,000 or $5,000. The bonds return the principal amount upon maturity and in the meantime pay regular interest, often semi-annually. Corporate bonds do not confer an ownership interest like equity investments.

High-Yield Bonds

A subset of corporate bonds is high-yield bonds. These are bonds from issuers whose risk levels prevent them from qualifying for "investment grade ratings" by the primary bond credit rating agencies. High-yield bonds offer higher interest rates to compensate for their perceived higher-risk levels.

Municipal Bonds

Municipal bonds are debt securities issued by cities or states. These bond issues are typically used to fund education, roads or other public service projects. One of the attractions of "muni" bonds is the income from them is often tax-exempt, although sometimes only in regard to federal income taxes, not state or local taxes. Municipal bonds are typically structured to make regular, specified interest payments and then return the principal amount at maturity.

Zero Coupon Bonds

Government or corporate entities may issue zero coupon bonds. Zero coupon bonds make no periodic interest payments. They return the principal amount plus the compounded earned interest at maturity. Zero coupon bonds sell at a substantial discount to their face amount because investors receive no income from them until maturity.

Some bonds are callable, or redeemed early by the issuer. Others are convertible, or converted into stock. Fixed-rate capital securities are an investment asset that is a sort of hybrid between a corporate bond and preferred stock, with some features of each.

  1. What determines bond prices on the open market?

    Learn more about some of the factors that influence the valuation of bonds on the open market and why bond prices and yields ... Read Answer >>
Related Articles
  1. Investing

    Corporate Bond Basics: Learn to Invest

    Understand the basics of corporate bonds to increase your chances of positive returns.
  2. Retirement

    How to Pick the Right Bonds For Your IRA

    Learn about the best types of bonds to include in an IRA depending on an investor's risk tolerance. Understand the tax benefits of holding bonds in an IRA.
  3. Investing

    5 Reasons to Invest in Municipal Bonds When the Fed Hikes Rates

    Discover five reasons why investing in municipal bonds after the Fed hikes interest rates, and not before, can be a great way to boost investment income.
  4. Investing

    Investing in Bonds: 5 Mistakes to Avoid in Today's Market

    Investors need to understand the five mistakes involving interest rate risk, credit risk, complex bonds, markups and inflation to avoid in the bond market.
  5. Investing

    The Basics Of Bonds

    Bonds play an important part in your portfolio as you age; learning about them makes good financial sense.
  6. Investing

    How Interest Rates Impact Bond Values

    The relationship between interest rates and bond prices can seem complicated. Here's how it works.
  7. Investing

    Explaining Government Bonds

    A government bond is a debt security a government issues.
  1. Bond Market

    The bond market is the environment in which the issuance and ...
  2. Straight Bond

    A straight bond is a bond that pays interest at regular intervals, ...
  3. Zero-Coupon Bond

    A zero-coupon bond is a debt security that doesn't pay interest ...
  4. Agency Bond

    An agency bond is a bond issued by a government agency. These ...
  5. Discount Bond

    A discount bond is a bond that is issued for less than its par ...
  6. Municipal Bond

    A municipal bond is a debt security issued by a state, municipality ...
Hot Definitions
  1. Bond

    A bond is a fixed income investment in which an investor loans money to an entity (corporate or governmental) that borrows ...
  2. Compound Annual Growth Rate - CAGR

    The Compound Annual Growth Rate (CAGR) is the mean annual growth rate of an investment over a specified period of time longer ...
  3. Net Present Value - NPV

    Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows ...
  4. Price-Earnings Ratio - P/E Ratio

    The Price-to-Earnings Ratio or P/E ratio is a ratio for valuing a company that measures its current share price relative ...
  5. Internal Rate of Return - IRR

    Internal Rate of Return (IRR) is a metric used in capital budgeting to estimate the profitability of potential investments.
  6. Limit Order

    An order placed with a brokerage to buy or sell a set number of shares at a specified price or better.
Trading Center