What Types of Bonds Are Available?
Bonds are issued by federal, state, and local governments; agencies of the U.S. government; and corporations. There are three basic types of bonds: U.S. Treasury, municipal, and corporate.
Bonds, bills, and note issued by the U.S. government are generally called “Treasuries” and are the highest-quality securities available. They are issued by the U.S. Department of the Treasury through the Bureau of Public Debt. All treasury securities are liquid and traded on the secondary market. They are differentiated by their maturity dates, which range from 30 days to 30 years. One major advantage of Treasuries is that the interest earned is exempt from state and local taxes. Treasuries are backed by the full faith and credit of the U.S. government as to the timely payment of principal and interest, so there is little risk of default.
Treasury bills (T-bills) are short-term securities that mature in less than one year. They are sold at a discount from their face value and thus don’t pay interest prior to maturity.
Treasury note (T-note) earn a fixed rate of interest every six months and have maturities ranging from one year to 10 years. The 10-year Treasury note is one of the most quoted when discussing the performance of the U.S. government bond market and is also used as a benchmark by the mortgage market.
Treasury bonds (T-bonds) have maturities ranging from 10 to 30 years. Like T-note, they also have a coupon payment every six months.
Treasury Inflation-Protected Securities (TIPS) are inflation-indexed bonds. The principal of TIPS is adjusted by changes in the Consumer Price Index. They are typically offered in maturities ranging from five years to 20 years.
In addition to these treasury securities, certain federal agencies also issue bonds. The Government National Mortgage Association (Ginnie Mae), the Federal National Mortgage Association (Fannie Mae), and the Federal Home Loan Mortgage Corp. (Freddie Mac) issue bonds for specific purposes, mostly related to funding home purchases. These bonds are also backed by the full faith and credit of the U.S. government.
Municipal bonds (“munis”) are issued by state and local governments to fund the construction of schools, highways, housing, sewer systems, and other important public projects. These bonds tend to be exempt from federal income taxes and, in some cases, from state and local taxes for investors who live in the jurisdiction where the bond is issued. Munis tend to offer competitive rates but with additional risk because local governments can go bankrupt.
Note that, in some states, investors will have to pay state income tax if they purchase shares of a municipal bond fund that invests in bonds issued by states other than the one in which they pay taxes. In addition, although some municipal bonds in the fund may not be subject to ordinary income taxes, they may be subject to federal, state, or local alternative minimum tax. If an investor sells a tax-exempt bond fund at a profit, there are capital gains taxes to consider.
There are two basic types of municipal bonds. General obligation bonds are secured by the full faith and credit of the issuer and supported by the issuer’s taxing power. Revenue bonds are repaid using revenue generated by the individual project the bond was issued to fund.
Corporations may issue bonds to fund a large capital investment or a business expansion. Corporate bonds tend to carry a higher level of risk than government bonds, but they generally are associated with higher potential yields. The value and risk associated with corporate bonds depend in large part on the financial outlook and reputation of the company issuing the bond.
Bonds issued by companies with low credit quality are high-yield bonds, also called junk bonds. Investments in high-yield bonds offer different rewards and risks than investing in investment-grade securities, including higher volatility, greater credit risk, and the more speculative nature of the issuer. Variations on corporate bonds include convertible bonds, which can be converted into company stock under certain conditions.
This type of bond (also called an “accrual bond”) doesn’t make coupon payments but is issued at a steep discount. The bond is redeemed for its full value at maturity. Zero-coupon bonds tend to fluctuate in price more than coupon bonds. They can be issued by the U.S. Treasury, corporations, and state and local government entities and generally have long maturity dates.
Bonds are subject to interest-rate, inflation, and credit risks, and they have different maturities. As interest rates rise, bond prices typically fall. The return and principal value of bonds fluctuate with changes in market conditions. If not held to maturity, bonds may be worth more or less than their original cost. Bond funds are subject to the same inflation, interest-rate, and credit risks associated with their underlying bonds. As interest rates rise, bond prices typically fall, which can adversely affect a bond fund's performance.
Mutual funds are sold by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the investment company, can be obtained from your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.
The information in this article is not intended to be tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. © 2012 Emerald Connect, Inc.
You may contact Deborah Koval
. She's an expert on this subject.
Note: Please be advised that this is a re-post from Deborah Koval
Charitable lead trusts are designed for people who would like to benefit a charity now rather than later. You may have heard about some charitable trust strategies before but decided against them because you wanted to make an immediate gift to charity.
With a charitable lead trust, your gift can have an immediate impact, and you’ll be entitled to other benefits as well. These trusts will enable you to take advantage of tax benefits and still make a significant gift.
If you are accustomed to making outright contributions to your favorite charity, or if you typically sell an investment and give all or a portion of the money to charity, you may be attracted to the special advantages of using a charitable trust.
Avoiding capital gains taxes on an appreciated asset is a very appealing benefit for investors. It is also a way for charitable organizations to receive a much larger donation because they are not required to pay tax on capital gains. Once the trust is established and the assets are transferred, the trustee can then sell the assets and reinvest the funds.
You also get an immediate charitable income tax deduction based on the “life expectancy” of your gift. With a charitable lead trust, you are giving the charity the income from the asset and not the asset itself. Your deduction will be based on the rate of return the charity can expect to receive, the duration of the trust, and the IRS tables used in the calculation. Your write-off will be limited to a portion of adjusted gross income but can be carried forward to future years.
With a charitable lead trust, the income from the reinvested assets will then go to the charity. The charity will receive distributions for the duration of the trust. You may specify a set number of years or the life of you or someone else. At the end of this period, the remaining assets are paid to you or your beneficiaries, for example.
A charitable lead trust may also help reduce family squabbles over inheritance. If you were to actually gift the asset to the charity upon your death, your heirs may feel somewhat cheated. By giving income to the charity during your lifetime and having the remaining assets paid to your beneficiaries upon your death, you may avoid much of this potential controversy.
If you are interested in increasing your gift to a charity and your tax benefits during your lifetime, a charitable lead trust may enable you to accomplish your goals.
By taking the time to plan your charitable gifts, you may be able to take advantage of some special tax benefits and make charitable giving a real win-win situation.
The use of trusts involves a complex web of tax rules and regulations. You might consider enlisting the counsel of an experienced estate planning professional and your legal and tax advisors before implementing such strategies.
Please contact Deborah Koval
. She's an excert for this one.
Note: Please be advise that this is a re-post from Deborah Koval
Financial advisors are those who are experienced and trained to help people with their financial plans and investments. That includes tax arrangements to retirement plans. The financial advisor can be paid through commission or in every transaction made.
If you’re partly convinced that you don’t need a financial advisor like Deborah Koval
, think again. Put it this way: you don’t simply fix your own teeth, or diagnose what’s the problem with your eyes on your own. However, you can seek for consultations on how to fix them and maintain them so you won’t have to deal with any more problems in the future. That is the same thing with financial advisors. So you better be prepared on how to choose a good financial advisor, so that you can get started working on your finances, including, of course, your goals.
There simply too many investments to choose from, and without proper knowledge, training, and experience, how will you know which one is best for you through making decisions backed with thorough knowledge of these things? You simply can’t pull this off on your own. You need an expert. A mistake in your decision making can affect your future entirely. So leave your future in the hands of an expert. Consult the professional advice of a financial advisor.
First of all, you must work with your financial advisor. After all, it is your goals that he will be working on. So make sure your goals are clear to him. You must remember that your financial advisor is only there to give you advice, hence the name, and not make decisions for you. You must learn how to make decisions based on the advices given by your financial advisor. Do not leave everything to him.
Your hired financial advisor must be completely aware of, aside from your goals, your lifestyle and your assets. Therefore, you must hire an advisor that you trust. Consider this when you’re thinking about how to choose a good financial advisor that can successfully help you with your goals. If you don’t trust your advisor with these things, you won’t go anywhere. With all the things that you need to consider: your lifestyle, your retirement goals, your short term goals, cash flow, your every day expenses, etc, a good financial advisor can help you balance things out, especially in your investments. He can give you options that won’t lead you to your destruction- financially.
One of the reasons why you need to have a financial advisor is time- your time. When you don’t know how and what decisions to make, you may end up thinking about things for a long time and even do an extensive research just to help you make the correct decisions. That effort cannot amount to the knowledge of financial advisors that they gained for years through studies, and more knowledge gained through experience and service to other people.
These financial advisors have studied for years about business and finance. They need to be certified for them to practice their profession. They examine financial trends every day. They gather and study different funds available and other options for financial planning, budget, and retirement. They have a good grasp on these things. That’s what makes them qualified and more reliable when it comes to making decisions that concern finance and investments.
You need to have a very good grasp of the industry, or else you’ll end up in unfortunate situations such as selling too early or too late, settling with the wrong insurance, feeling uneasy with your decisions, etc. You must understand that things change rapidly in the financial world
. Instead of doing these things by yourself, you can hire a financial advisor who can make things clear to you. Instead of doing all these things on your own, start thinking on how to choose a good financial advisor, so that you’ll save yourself from all the efforts and the biggest probabilities of making the wrong decisions.
Again, you need to look for a financial advisor that you can trust. It is important that you have confidence in your financial advisor. A good financial advisor will never give advices that are unstudied. You and your family’s future depends on how well you and your financial advisor work together to achieve all your financial goals.
NOTE: This is a re-published content from Deborah Kova
In April, the International Monetary Fund (IMF) forecasted global economic growth of 3.5% for 2012, noting that the U.S. economy had gradually gained momentum, whereas China and other emerging economies appeared to be headed for gradual slowdowns. However, the IMF also warned that if the debt crisis in Europe deteriorated into a worldwide financial crisis, the fallout could produce a 2% drop-off in global growth over two years.1
More recent economic data released in May suggests that growth slowed more than expected in a number of the world’s major economies, primarily because problems in Europe have recently re-emerged.
There are significant differences in the economic challenges facing government leaders in Europe, Asia, and the United States, yet expanded world trade and globalization in general have made the fates of many nations more interdependent. All Eyes on Europe
In mid-May, Greek political parties were unable to form a coalition government, and a caretaker government was named until new elections take place in mid-June. The outcome is likely to determine whether Greece will abide by the deal reached to restructure its debt under conditions set by the European Union (EU), the International Monetary Fund, and the European Central Bank. Voter anger over austerity measures and resulting political instability have reignited uncertainty about whether Greece will stay in the eurozone.2
Eurozone unemployment has risen to record highs (10.9%), and strict austerity programs in a number of European nations have held back growth more than expected. Europe barely avoided a recession during the first quarter of 2012, but 11 individual nations in the EU are judged to be in a recession.3 China
Economic data measuring trade, investment, spending, and output for April was surprisingly weak, prompting government action to help promote lending and speed up economic growth. The People’s Bank of China lowered the share of deposits that banks must hold in reserve (the required reserve ratio) by 0.5%.4
Until recently, Chinese leaders seem to have been more concerned about fighting inflation. However, China’s economic growth slowed from 8.9% to 8.1% in the first quarter — the slowest pace in nearly three years — when an uptick was expected.5–6 Reduced European demand for Chinese goods has been cited as a reason for the slowdown; the eurozone is the largest market for Chinese exports.7
When balancing growth and inflation, China’s authoritarian government may be able to act more decisively than democratic societies. Elected leaders often negotiate or justify policy moves and contend with public backlash. But Chinese leaders grapple with many of the same risks as other nations in the global marketplace. India
The inflation rate in India (9% for most of 2011) is still the highest among the emerging-market nations known as BRICS (Brazil, Russia, India, China, and South Africa). Inflation has been cooling, but prices rose faster than predicted (7.23%) in April.8
Efforts to lower inflation, along with fewer exports to Europe, caused economic expansion to sag to a three-year low of 6.1% in the December quarter. In response, India’s central bank cut interest rates for the first time since 2009.9
Fiscal deficits and political gridlock have also put India’s investment-grade status at risk. Standard & Poor’s recently lowered the country’s credit outlook from “stable” to “negative.”10 Will U.S. Fortunes Follow?
So far, the trouble in Europe has affected Asia more than the United States. Exports account for less than 15% of the U.S. economy, compared with 30% for China.11
Still, if conditions in Europe worsen, the situation could continue to affect trade and growth around the world. Therefore, U.S. consumer and investor confidence is likely to depend on how the situation in Europe ultimately unfolds. Investing internationally carries additional risks such as differences in financial reporting, currency exchange risk, as well as economic and political risk unique to a specific country. This may result in greater investment price volatility. All investments are subject to market fluctuation, risk, and loss of principal. When sold, investments may be worth more or less than their original cost. Investments seeking to achieve higher yields also involve a higher degree of risk. http://www.deborahkoval.com/HOT-TOPIC-Watching-for-Weakness-in-the-Global-Economy.c3676.htm