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. Why do zero coupon bonds tend to be volatile?

    Learn why the price of zero coupon bonds is volatile and why some investors may wish to hold them in retirement accounts ... Read Answer >>
  2. What do cities do with the funds generated from municipal bonds?

    Learn more about municipal bonds, including the various types of bonds issued and the purposes of municipal bond funds, such ... Read Answer >>
  3. Can Mutual Funds Only Hold Bonds?

    Find out which mutual funds include only bonds in their portfolios. Learn why some funds invest in different types of bonds ... Read Answer >>
  4. How do the returns on municipal bonds compare to those of other bonds?

    Learn how tax-free municipal bonds may provide better returns than other types of bonds, and understand the risks of municipal ... Read Answer >>
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