Bonds are also good for anyone who wants to add some investments in their portfolio or reduce their taxes payments. Bonds are fixed income securities and they have a strong potential to give a steady cash flow and could perhaps be used to diversify an investment plan. Furthermore, it is imperative to note that some kinds of bonds bear tax exemptions, an aspect that makes them suitable investment choices for those having tax sensitiveness.
Bonds are fixed income investments that an investor can hold for diversification and earning an income while lending to organizations or a government with interest and a promise to repay the principal amount after a specific period of time.
Mainly we can summaries all kinds of bonds in four categories:
1. Government Bonds:
These are those bonds which are issued by national government and it is among the securest investment forms out there. These bonds normally provide relatively low returns compared with other bonds but has relatively low risk of default.
Government bonds can be further categorized into:
1. Treasury Bonds:
Available from the United States Department of the Treasury, treasury bonds are guaranteed by the U. S money stable. In this regard, they are still classified according to their maturities, which include short-term and long-term instruments.
2. Municipal Bonds:
These bonds are released either by state or local governments and they are free from federal income tax and possibly state and local income tax as well. It is widely applied in cases when an investor is in the necessity of receiving tax-free income.
2. Corporate Bonds:
Corporate bonds are a financial tool by which a business borrows money and sells it in the form of debt instruments to the public. They usually provide higher rates compared to government securities but denoted by the level of credit risk.
Corporate bonds can be classified into:
1. Investment-Grade Bonds:
There are said to be of lower risk and safer since they are floated in the market by companies with good credit ratings and are referred to as investment grade bonds.
2. High-Yield Bonds:
Usually, high-yield bonds are sold by companies that have a low credit standing and they pay relatively higher amounts of money in returns since there are higher chances that the bonds will go bust. These bonds can be suitable for investors who are ready to receive more significant income but at the same time can face higher risks.
3. Savings Bonds:
Savings bonds as also known as Series EE, are non-marketable bonds that are offered by the U S Department of the treasury. It also suggests that money base is safe and secure and also money can be bought at cheaper price than its face value.
Savings bonds come in two main types:
1. Series EE Bonds:
They carry a fixed rate of interest for as long as 30 years and the interest has no state and local tax implications. It is held for not less than one year before it can be exchanged for something else of value.
2. Series I Bonds:
The Series I bonds offer a fixed interest rate combined with an inflation-indexed one which offers shield against inflation. They also do not pay state or local taxes and they provide tax deferment advantage.
4. Tax-Exempt Bonds:
Some equities like tax-exempt bonds including municipal bonds discussed earlier offer income exempt from federal income tax, and sometimes, state and local taxes as well. These bonds can prove quite beneficial for those investors in the higher tax bracket desirous of maximizing their income in taxable accounts.
For the most part:
Knowing which type of bond is good for investment or taxation, sometimes involves; your investment needs, your attitude to risks, and your tax profile. The provincial and federal government bonds are known for their safety and steady returns on Investment while the corporate bonds have the possibility of higher risk adjusted returns. Tax-exempt bonds can particular aid in the reduction of an investor’s taxes where he is paying taxes in the higher brackets.
Though, it is necessary to know the type of the bond you want to invest in, and it is also significant to consult with the financial consultant with regards to the most suitable way to invest based on the type of bond and the current financial scenario.