Types of Bonds
Fidelity Investments
There are four major types of bonds in the U.S. market:
Government bonds, issued by the U.S.
Treasury and its agencies, constitute the largest sector of the world's bond market.
U.S. Treasury bonds are considered the highest quality of all bonds because
they are backed by the full faith and credit of the U.S. government. (Shares of funds
that invest in U.S. Treasury bonds are not.) In exchange for this very high margin
of credit safety, they have the lowest yields.
Mortgage-backed bonds are backed
by a pool of home mortgage loans. The vast majority are issued or guaranteed by government
agencies. Mortgage securities issued by the Government National Mortgage
Association (Ginnie Mae) are backed by the full faith and credit of the U.S.
government. (Shares of funds that invest in Ginnie Maes are not.) Ginnie Maes offer the
same high-credit safety as U.S. Treasuries.
Corporate bonds are issued by
corporations to finance expansion and other activities.
These bonds are rated based on their potential to pay interest on time and the
principal back at maturity. Quality ratings are given by companies such as Moody's
Investors Service and Standard & Poor's ®. Higher-rated corporate bonds are
considered investment grade. Lower-rated corporate bonds, often referred to as
below investment grade, offer higher potential returns but are considered speculative
because the issuing corporation's future is deemed less certain and their risk is higher.
Municipal bonds are issued by
governments and municipalities. They offer income that is generally free from
state and/or federal income taxes; however, a portion of the income may be
subject to the Federal Alternative Minimum Tax (AMT). Usually, municipal
bonds are appropriate for investors in the higher tax brackets, because they
can lower taxes. Investors in the lower tax brackets are usually better off
in taxable investments.
Standard and Poor's® is a registered service mark of The
McGraw-Hill Companies, Inc. and has been licensed for use by Fidelity Distributors Corporation.
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