Money, Money, Money Project
PBMF - 5th Period
Definition of the Types of Bonds
Government Bonds: A government bond is a bond issued by a national government, generally with a promise to pay periodic interest payments and to repay the face value on the maturity date.
Kid version: Government bonds are usually used in the country's own currency.It is debt security, the person that’s giving the debt owes the person holding the debt and depending on the debt, the issuer has to pay them interest.
Municipal Bonds: known as "munis",is the next progression in terms of risk. Cities don't go bankrupt that often, but it can happen. The major advantage to munis is that the returns are free from federal tax.
Kid version: The major advantage is the returns are free from federal tax. Local governments will also sometimes make their debts non taxable for residents, meaning that taxes cannot be put on them.
Corporate Bonds: are characterized by higher yields because there is a higher risk of a company defaulting than a government.
Kid version: There is a higher risk for companies using these bonds, but they can also be the most rewarding.The company's credit quality is very important: the higher the quality, the lower the interest rate the investor receives.
Zero-Coupon Bonds: This is a type of bond that makes no coupon payments but instead is issued at a considerable discount to par value. For example, let's say a zero-coupon bond with a $1,000 par value and 10 years to maturity is trading at $600; you'd be paying $600 today for a bond that will be worth $1,000 in 10 years.
Kid version: Zero Coupon Bonds have a value that is their maturity value. They are issued at a discount from that value.