Bonds and Notes
A bond is a debt security, meaning that when you buy a bond, you are essentially making a loan. Unlike stock, which gives you a piece of ownership of a company, with bonds you become a lender to the bond issuer.
Bonds are issued by several entities – such as companies, banks, cities, states, and countries -- to finance projects and operations. The issuer pays interest to the bondholder at certain intervals, usually twice a year. Bonds come with an end date, called maturity, at which the principal will be repaid along with any outstanding interest.
Bonds are considered lower risk than stocks because they pay a fixed interest rate throughout the life of the bond. Bond interest is typically lower than the bondholder could make from stocks, but it’s also guaranteed, while stocks can and do lose money.
Bond categories
Common types of bonds include:
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Corporations issue bonds to raise money for capital expenditures, operations, and acquisitions. Corporations in all industries issue bonds. A corporate bond is essentially an IOU from the company to the bondholder. Although corporate bonds do not give you a piece of ownership in the corporation the way a stock does, as lenders, bondholders are paid before stockholders if the company goes bankrupt.
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Municipal bonds, also called munis, are issued by sub-national governments such as cities, counties, and states, to fund public works such as parks, libraries, or highways. Interest earned on municipal bonds is often tax free.
Types of muni bonds, include:
General obligation bonds. Bondholders are paid from the local government’s general revenue stream, often generated by property taxes. The local government can raise taxes if needed to pay back the bondholders.
Revenue bonds. Bondholders are paid by the local government from revenue generated by a specific project, such as a toll road or lease fees.
Conduit bonds. Bondholders are paid by the local government, which in turn is paid by a private entity such as a nonprofit college or hospital. If the private entity fails to pay, the local government usually does not have to pay the bondholder.
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Treasury securities are issued by the Department of the Treasury on behalf of the U.S. government. Backed by the “full faith and credit” of the federal government, they have historically been considered among the safest investments available.
There are three types of treasury securities, depending on length of maturity:
Treasury Bills (T-bills), with maturity terms of a few days to one year.
Treasury Notes (T-notes), with maturity terms of two, three, five, seven or 10 years.
Treasury Bonds, with maturity terms of 10 to 30 years.
Treasury securities can be purchased directly from the U.S. Treasury’s website, but only on dates that particular security is on sale, according to the auction calendar. Interest income from Treasury securities is taxable on the federal level, but not the state or local level.
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Green bonds are bonds that finance projects with a positive environmental impact, such as renewable energy, energy efficiency, clean public transit, green buildings, pollution control, and green spaces. The World Bank issued the first green bond in 2008. Since they their popularity has taken off, with over $1 trillion in green bonds expected in 2024.
An example of a green bond is the Connecticut Green Bank’s Green Liberty Bonds and Notes. While Green Liberty Bonds must be purchased through a participating brokerage firm, the bank has held 13 offerings of Green Liberty Notes, which can be purchased for as little as $100 – essentially crowdfunding clean energy and energy efficiency projects.
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Other types of bonds include
U.S. Savings Bonds, issued by the Treasury Department.
Agency bonds, issued by federal agencies other than the U.S. Treasury, such as the Federal Housing Administration or Small Business Administration.
Buying and selling bonds
Before they mature, some bonds can be bought and sold on the market like stocks. U.S. Treasury securities are among the most commonly traded bonds,
When bonds are bought or sold, the principal amount and interest paid on the bond remains the same, but the sale price of the bond can fluctuate. That’s because interest rates fluctuate.
If you are selling a bond that was issued with lower interest than the current interest rate, it is less attractive than a new bond, so is usually sold for a lower price. Conversely, if the interest rate on the bond is higher than the current rate, it can sell for a higher price.
