Three Types of Government Bonds

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A bond is an instrument of debt that functions both as an investment and a loan. Simply put, a bond is a loan from a lender to a borrower, aka an issuer. A bond lender is any organization, firm or individual that has cash to lend. A borrower is a business or a governmental entity that requires cash to finance particular activities or programs. A government bond is issued by the government for a specific, pre-defined period of time, called its term. Its principal amount is repaid along with interest accrued on the maturity date of the bond.

Treasury Securities or Treasurys

  • Treasury securities are issued by the U.S. Treasury Department. Treasurys are safe and are backed fully by the U.S. government. The main types of Treasurys include: Treasury bonds, Treasury notes and Treasury bills.

    Treasury bonds, also called T-bonds, are long-term instruments of debt that mature in more than 10 years. The bond holder is eligible to semi-annual interest payments.

    Treasury notes, also called T-notes, mature between one to 10 years. The bond holder is eligible to interest payment every six months.

    Treasury bills, also called T-bills, are liquid instruments of debt that mature in one year or less--13 weeks, 26 weeks or 52 weeks from their issuing date.

Municipal Bonds

  • A local government, city or state issues municipal bonds. Their purpose is to generate money for day-to-day operations and specific municipal projects such as infrastructure development. The two main types of municipal bonds are revenue bonds and tax-backed bonds.

    Revenue bonds include airport revenue bonds, college and university revenue bonds, hospital revenue bonds, public power revenue bonds, single-family mortgage revenue bonds, seaport revenue bonds, student loan revenue bonds, resource recovery revenue bonds and water revenue bonds.

    Other types of municipal bonds include structured or asset-backed securities, refunded bonds, bank-backed municipal bonds and insured bonds. Tax-backed municipal bonds are issued by towns, cities, special districts, counties and states and are secured by tax revenue.

Zero Coupon Treasury Bonds

  • A zero coupon bond, also called a zero, is issued and fully backed by the U.S. government. Zero coupon bonds are also called strips, short for separate trading of registered interest and principal of securities. These bonds are bought below face value, and their principal amount, plus interest, payment is accrued at the time of maturity. Zero coupon bonds do not make recurring interest payments, or coupons.

References

  • U.S. Treasury: Treasury Direct
  • "Fundamentals of Corporate Finance"; Stephen A. Ross, Randolph Westerfield, Bradford D. Jordan; 2008
  • "Bond Markets: Analysis and Strategies, 5/e"; Frank J. Fabozzi; 2009
  • Photo Credit savings bonds image by Stephen VanHorn from Fotolia.com
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