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Bonds: Types, Risks, and Benefits

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Submitted By bicer
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BONDS: TYPES, RISKS, AND BENEFITS
When a corporation wants to borrow money from the public on a long-term basis, it does so by selling securities that are called bonds. There are different types of bonds available, each with different risks and rewards. The different factors associated with each type of bond, determines how it fits into your portfolio.
A bond is an interest-only loan, where the borrower will pay the interest every period, and then repay the principal amount at the end of the loan. The value of bonds fluctuates. When the interest rate increases, the bond becomes worth less.
When interest rates fall, the bond becomes worth more. A bonds value at a particular point in time, known as its yield to maturity, can be calculated by using information such as: the number of periods to maturity, the face value, the coupon or stated interest payment made on a bond, and the market interest rate for bonds with similar features. With this information we can calculate the bonds yield to maturity (YTM) or “Yield” for short.
The US government is the biggest borrower in the world. In early 2009, the total debt of the US Government was approaching $11 Trillion Dollars. When the government wants to borrow money for more than one year, it sells Treasury
Notes/Bonds to the public. Most US treasury bonds are just ordinary coupon bonds. Some older issues are callable meaning the government can repurchase the bond at specific price prior to maturity. Treasury issues have no default risk because the Treasury can always come up with the money to make the payments. In addition, Treasury issues are exempt from state income taxes but not federal income taxes.

State and local governments also borrow money the same way as the federal government. State and Local issues are called municipal notes/bonds or just
“munis.” Municipal bonds have varying degrees of…...

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