All Types of Bonds Explained (The Ultimate Guide for 2023)
Last Updated: March 10, 2023
If you’re looking to invest in bonds, but don’t know what your options are, we’ve got you covered! In this article, we’ll look into what types of bonds there are, what’s popular this year, and whether you’re looking for a safe investment or something with a little more risk. By the time you finish reading this article, you’ll be an expert on the subject!
How Do Savings Bonds Work?
A savings bond is a type of bond issued by the United States government that allows you to lend money to the government in exchange for a fixed interest rate that never goes down (and can sometimes go up). The money you invest in savings bonds will be repaid to you with interest after a certain amount of time. If you’re new at this, you can always turn to some investment tools that are especially suitable for beginners for some guidance in the process.
The biggest benefit of these kinds of bonds is that they’re backed by a “full faith and credit” guarantee on behalf of the United States government, which means you’re guaranteed to get your money back with interest. Such bonds are purchased directly from the government website, meaning there’s no need for a bond broker to complete the purchase. Savings bonds are also very low-risk, which makes them a good choice for conservative investors. All savings bonds have an end date, also known as the maturity date in the investing world.
What Is a Maturity Date?
The maturity date is the date on which the bond expires and must be redeemed by the issuer for the full amount with interest. Another term worth noting when talking about these kinds of bonds is the coupon rate, which represents the interest paid to bondholders either annually or semiannually.
What Are Bearer Bonds?
Bearer bonds are a type of debt security where the interest payments are made to whoever holds the bond certificate. They’re different kinds of bonds compared to savings bonds because of how bondholders claim ownership—if the bond is lost or stolen, the bondholder at the time will receive the interest payments. The holder of a bearer bond can cash the bond amount at any time, without needing any paperwork. Therefore, although bearer bonds are riskier than other bond types, they offer higher returns.
|Did You Know: If you’re looking to buy stocks, you should always observe bonds and their effect on the market at the time. When bonds go down, stocks go up, giving you an amazing opportunity to look for stocks that are cheap to buy on the stock market at the time. You can even find stocks that are under $1.|
Other Types of Bonds:
The other most common bonds are as follows:
1. Fixed-Rate Bonds
A fixed-rate bond is a type of debt security where the interest rate remains fixed in all the duration of the bond. At maturity, the principal (the amount you originally invested) will be repaid to you. Fixed-rate bonds are low-risk and ideal for conservative investors. As their name implies, they’re resistant to any changes in the bond market because once bought, their interest rate remains constant. During the bond’s duration, you’ll have no access to your money. The longer you keep your money tied, the more profit you’ll have, but you can put your money in a fixed-rate bond for a minimum of six months.
2. Floating Rate Bonds
What are the types of bonds that have a variable interest rate? You got it—floating rate bonds. A floating rate bond is a type of debt security that pays a variable interest rate, meaning the interest rate on the bond changes over time, depending on what’s happening in the market. In the US, floating-rate bonds are offered by companies rated below investment grade. Floating rate bonds are types of investment bonds ideal for more aggressive investors because they offer the potential for higher returns. Also, they’re ideal for investors who want to maintain a portfolio return that keeps up with inflation. If the interest rate goes up, investors will receive a higher income, and if rates go down, the income will be lower.
3. Zero Interest Rate Bonds
A zero interest rate bond is a type of bond that doesn’t earn you any interest on your investment. Instead, at maturity, the issuer pays you back your principal. Zero-interest rate bonds are different types of bonds as opposed to floating-rate bonds in that they’re very low-risk because you’re guaranteed to get your money back. They trade at a deep discount, where the full face value is paid at maturity, but zero-interest bonds are not ideal for investors looking to earn a high return on their investment.
4. Inflation-Linked Bonds
Inflation-linked bonds are a type of debt security where the interest payments and/or the principal (the amount you originally invested) are linked to inflation. This means that as inflation goes up, so does the interest rate on the bond, but if inflation goes down, the payments for this type of bond go down with it. They’re created with one goal in mind—to protect the investor from inflation, so they’re ideal for investors looking for this type of protection.
5. Perpetual Bonds
How many types of bonds are there that have no maturity date? There is only one such bond, and it’s called a perpetual bond. Since this is a bond with no end date, it can be held indefinitely and will continue to pay interest indefinitely. However, even though they have no maturity date, the issuer may still redeem the bond after some specific time because most perpetual bonds have a call feature. Thus, perpetual bonds are very risky, because investors don’t get their principal back, and there’s no guarantee for how long the interest payments will last.
6. Subordinated Bonds
A subordinated bond falls under the bond categories where the interest payments are made after the payments on senior bonds. This means that if the issuer defaults on the financial contract, the holders of subordinated bonds will only get paid after the holders of senior bonds have been paid. Subordinated bonds are riskier than senior bonds, but they offer higher returns.
7. War Bonds
War bonds are a type of debt security issued by a government during times of conflict to raise funds in case of war. War bonds are used to finance the war effort and are typically sold to the general public. As they’re backed by the full faith and credit of the government, war bonds are very low-risk.
8. Serial Bonds
A serial bond falls under the type of bond that pays interest at regular intervals (usually every six months). This means that the holder of a serial bond will receive six payments over the life of the bond. Serial bonds are ideal for investors who want regular income payments.
9. Climate Bonds
Climate bonds are a type of debt security issued to finance climate change mitigation and adaptation projects. They’re issued by any government to raise funds linked to climate change solutions. Unlike other bond categories, climate bonds are considered to be green investments because they’re used to finance projects that have a positive impact on the environment.
|Did You Know: The most common reason to invest in bonds is the predictable income. Also, many choose to invest in bonds because when the bond reaches its maturity date, bondholders get the amount of money they invested, so in a way, they preserve capital while they invest money.|
|Savings bonds are fully backed by the US government.|
|The holder of the bearer bond can cash out the full amount of money at any given time.|
|Floating rate bonds have a variable interest rate, while fixed-rate bonds, as their name implies, have a fixed interest rate during the span of the bond’s duration.|
|Inflation-linked bonds have a goal to protect the investor from inflation.|
There are many different kinds of bonds available for investors in 2022. Each type of bond has its own unique benefits and risks, so it’s important to consider your investment goals and risk tolerance when choosing a bond that’s right for you.
The most common type of bond is the savings bond, which is very low-risk because it’s backed by the full faith and credit of the United States government, so it’s ideal for investors looking for a safe investment.
The safest bonds to invest in from those mentioned above would be zero interest and fixed-rate bonds. Although these bonds guarantee you’ll get your money back, keep in mind there’s a low return on these types of bonds.
There’s no way to know for sure whether bonds are a good investment. However, from the look of the bond market so far this year, we can say that bonds, especially government bonds, are a good investment—maybe even the best one, because if the interest rates rise, you won’t be exposed to too much risk.
The weakest bond is the subordinated bond, as it’s riskier than other types of bonds, but it offers higher returns.