Types of BondsEdit
The ultimate in safety these are issued by federal governments.
More varied in safety, their quality ranges from very secure to junk status. Before getting one, it is usually a good idea to check on its rating. One of the agencies responsible for rating bond quality is Moody's.
The potential disadvantage here is that they frequently pay less than normal corporate bonds. The advantage, however, it that unlike normal bonds these can be convertible into tradable shares of company stock.
Issued by local governments, these usually have the side advantage of paying out interest on a tax-free basis. The drawback is that the amount of interest paid is usually less than of corporate bonds.
- Series E
- Series EE
- Series H
- Series HH
- Series I - First issued in 1998, these have the advantage of being inflation protected.
Treasury Inflation-Protected Securities (TIPS)Edit
These were first issued by the US Treasury in 1997. Similar in structure to Treasuries, these have the advantage of being inflation protected. As inflation moves up, the face value of the bond increases to match changes in the Consumer Price Index (CPI) inflation. This has the effect of increasing the amount of interest being paid out.
With these securities, there are three components to consider:
- The rate of return. This is a percentage rate set at the time the bond is issued.
- Unlike other bonds, the face value of the bond is tied to the Consumer Price Index for Urban Consumers. As such, these bonds are periodically readjusted to reflect the changes in the index.
- This component is the result of the first two. Since the dividend rate remains unchanged, the dollar payout of the dividend changes to reflect the change in face value.
The final advantage, is that when the bond finally matures, it is redeemed at the adjusted value, unless it is less than the original value at issue.
- Volatility: For TIPS, volatility is higher than for other bonds.
- Phantom Income and Taxes: Even though the inflation adjustments aren't paid out until maturity, they are taxed as income in the year that they occur.
- Treasure Direct - Information on bonds issued by the United States Government, and on how to buy them.