Just as there are many different types of equities, investors who are looking to buy into bonds need to understand that there are many different characteristics to bonds.
Arguably the most obvious things that investors will look at are maturity (or duration of the portfolio as a whole) as well as credit quality.
However, there is more to a bond than the above and the following categories of bonds are worth knowing and getting familiar with for people who are interested in invested in this fixed income asset class.
- Government vs.
Corporate.
There will be a fairly big difference in quality between government bonds and corporate bonds.
The biggest difference in quality will typically show in the coupon rate as poorer-quality corporations that borrow in the form of issuing bonds will pay more than governments (for the most part).
- Treasuries vs.
Municipal.
In speaking of governments issuing bonds, there will be a fair degree of difference between treasuries issued at the Federal levels of government and municipal bonds issued by municipalities.
In some cases, poorer quality municipal bonds will be higher risk than some decent-quality corporate bonds.
However, many municipal bonds are seen as being attractive at the moment given their higher yields.
- Junk Bonds.
Junk bonds are typically purchased a steep discounts as the chance of recovering the face value is considered low to non-existent.
These are the lowest quality bonds based on quality and many of them do not pay a coupon.
- Global bonds.
Seen as lucrative by many professional and individual investors, global bonds allow investors to obtain yield from non-domestic sources.
The greatest appeal with these types of bonds is that they often pay higher yields despite decent quality ratings.
For example, bonds issued in emerging markets like China, India or even many South American countries will often share the same credit quality as those issued by domestically, but due to prevailing rates in that country the coupon could be considerably higher.
As well, global bonds offer a way for investors to safeguard against currency risks.
These four different points allow bond investors to diversify their bond holdings in such a way that they can optimize returns or income while diversifying their risks associated with this asset class.
Some of them could be a core component to their investment portfolio, while others (such as junk bonds) could a small percentage, such as a specialty asset class in any other portfolio.
Arguably the most obvious things that investors will look at are maturity (or duration of the portfolio as a whole) as well as credit quality.
However, there is more to a bond than the above and the following categories of bonds are worth knowing and getting familiar with for people who are interested in invested in this fixed income asset class.
- Government vs.
Corporate.
There will be a fairly big difference in quality between government bonds and corporate bonds.
The biggest difference in quality will typically show in the coupon rate as poorer-quality corporations that borrow in the form of issuing bonds will pay more than governments (for the most part).
- Treasuries vs.
Municipal.
In speaking of governments issuing bonds, there will be a fair degree of difference between treasuries issued at the Federal levels of government and municipal bonds issued by municipalities.
In some cases, poorer quality municipal bonds will be higher risk than some decent-quality corporate bonds.
However, many municipal bonds are seen as being attractive at the moment given their higher yields.
- Junk Bonds.
Junk bonds are typically purchased a steep discounts as the chance of recovering the face value is considered low to non-existent.
These are the lowest quality bonds based on quality and many of them do not pay a coupon.
- Global bonds.
Seen as lucrative by many professional and individual investors, global bonds allow investors to obtain yield from non-domestic sources.
The greatest appeal with these types of bonds is that they often pay higher yields despite decent quality ratings.
For example, bonds issued in emerging markets like China, India or even many South American countries will often share the same credit quality as those issued by domestically, but due to prevailing rates in that country the coupon could be considerably higher.
As well, global bonds offer a way for investors to safeguard against currency risks.
These four different points allow bond investors to diversify their bond holdings in such a way that they can optimize returns or income while diversifying their risks associated with this asset class.
Some of them could be a core component to their investment portfolio, while others (such as junk bonds) could a small percentage, such as a specialty asset class in any other portfolio.