The most important consideration in choosing a bond is the issuer, since you are counting on this entity to return your investment capital to you. The seven issuer categories include:

·       Treasury Bonds – Backed by the government, you help finance the federal budget deficits. Thanks to Uncle Sam’s taxing authority, they’re almost risk-free. The yields are among the lowest, but they have historically continued to perform in the positives, even during economic downturns. The interest is exempt from state income tax.

·       Other US Government Bonds – Sometimes called “agency” bonds, these bonds are issued by federal entities like Fannie Mae, Ginnie Mae, and Freddie Mac. These bonds are not fully guaranteed by the US Treasury.  Interest on these bonds is taxable at state and federal levels, however.  

·       High-Quality Investment-Grade Corporate Bonds – Companies with strong balance sheets offer the highest quality corporate bonds. They carry ratings of AAA, AA, A, or BBB by Standard & Poor’s, Moody’s, or both. During downturns, they underperform treasury and agency bonds and they are fully taxable, but generally the yields are still higher than government-backed bonds.

·       Low-Quality High-Yield Corporate Bonds (Junk Bonds) – Companies with weak balance sheets and ratings below BBB with substantial risk of defaulting offer high-yield corporate bonds. Companies use your money to expand operations or pay off debts. Those who are in a poor position will offer a higher rate of return to compensate for the elevated investment risk. Yields are generally consistent. However, the company may file for bankruptcy.  In the event the company files for bankruptcy, bond holders are paid before stock holders, and there may not be enough assets to return bond holders’ capital investment.

·       Emerging Market / Foreign Bonds – The average foreign bond has a third of its assets tied in foreign-currency-denominated debt. The issuer promises to make fixed interest payments and return the principal in another currency. The size of the payment depends upon the exchange rates and the strength of the US dollar.  In general, long-term foreign bonds have relatively high-yield. 

·       Mortgage-Backed Bonds – These loans help build commercial real estate like office complexes, hotels, malls, apartment buildings, and factories. The face value of a mortgage-backed bond represents high risk — $25,000, as opposed to $1,000 or $5,000 for other types of bonds. As with corporate bonds, there is a risk of default.

·       Municipal Bonds – Munis are issued by state and local governments in high-yield or investment-grade categories. Entities use your investment on projects like building bridges, highways, hospitals, public housing, roads, schools, and utilities. Their interest is tax-free, but yields vary. They are generally considered one of the most stable investment vehicles, next to treasury bonds and savings accounts. Since they are traded on a secondary market, the they are liquid investments under normal market conditions.