Municipal Bonds\u00a0<\/strong><\/h4>\nMunicipal bonds come in two main varieties: general obligation (GO) bonds and revenue bonds. GO bonds are backed by the full faith and credit of the issuer\u2014usually a state or local government\u2014and are generally considered safe investments because they have guaranteed repayment. Revenue bonds, on the other hand, are secured by the revenue generated from a specific project funded with bond proceeds\u2014for example, toll roads or airports.\u00a0Revenue bonds are riskier than GO bonds but may offer higher yields.<\/p>\n
The primary benefit of investing in these types of bonds is most state and local governments do not pay federal income tax on the interest earned from these investments. This means investors can earn tax-free interest income if they purchase them within their state. Furthermore, many states exempt muni bond interest from state and local taxes as well\u2014this is known as double tax exemption. For this reason, many investors choose to incorporate a municipal bond to diversify their portfolios while receiving attractive tax benefits.\u00a0\u00a0<\/span><\/p>\n<\/p>\n
Municipal bonds are one common type of bonds<\/p>\n<\/div>\n
Agency Bonds<\/strong><\/h4>\nAgency bonds are debt securities issued by government-sponsored entities (GSEs) such as Fannie Mae, Freddie Mac, and the Federal Home Loan Banks. The U.S. government created these entities to improve access to credit for homeownership and other purposes. As a result, they have an implicit guarantee from the federal government. If they cannot meet their obligations, the federal government will ensure investors receive their returns.<\/p>\n
There are two types of agency bonds: short-term and long-term. Short-term agency bonds generally mature in one year or less and offer a lower interest rate than long-term agency bonds because of their shorter maturities. Long-term agency bonds typically have maturities over ten years and offer higher interest rates due to longer time horizons.<\/p>\n
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Corporate Bonds<\/strong><\/h4>\nA corporate bond is essentially a loan taken out by corporations from investors. In exchange for lending money to the corporation, investors receive interest payments on the bond and the principal when the bond matures. When a company issues a corporate bond, it agrees to pay back its debt in full at the maturity date. This repayment promise is called the \u201cbond indenture\u201d or \u201cbond agreement\u201d and outlines all of the details regarding payment terms and conditions.<\/p>\n
The price of corporate bonds can fluctuate depending on changes in market interest rates, the credit quality and risk of the issuer, investor sentiment toward credit risk in certain industries or sectors, and other factors affecting demand for bonds, such as geopolitical events or economic news. As interest rates go up, so do bond prices; conversely, when interest rates fall, so do bond prices. Therefore, investors need to understand how changes in market dynamics affect their investments to make informed decisions about when to buy or sell their bonds.<\/p>\n
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Corporate Bonds are another type of bond<\/p>\n<\/div>\n