GOVERNMENT BONDSTo raise money for current operations or future expansion, most governments and corporations sell bonds. A bond is a certificate representing a promise to pay a definite amount of money at a stated interest rate on a specified due date. The due date is also called the maturity date. Bonds are similar to promissory notes issued by individual borrowers. When you buy a bond, you are lending money to the organization selling the bond. You become a creditor of the organization. Governments issue bonds to raise money for funding public services. The federal, state, and local governments issue a variety of bonds.
Municipal BondsA city may want to build a new park or new school. A state may need funds to build or repair highways and bridges. Bonds issued by local and state governments are called municipal bonds , or munis.
Municipal bonds often have an advantage over bonds issued by companies. Usually, interest earned on municipal bonds is exempt from federal and most state income taxes. In order to avoid taxes, people buy municipal bonds even though the interest rates usually are not as high as the rates offered on corporate bonds. In general, most municipal bonds are considered safer investments than corporate bonds.
U.S. Savings BondsFor people with small amounts of money to invest, U.S. savings bonds are a safe investment. Series EE savings bonds come in denominations ranging from $50 to $10,000.
A Series EE bond is bought at half its face value. A $50 bond costs $25. At the end of its full term, it pays at least $50. The difference between the purchase price and the redemption value is the interest earned. The length of time the bond is held determines the amount of interest. The time it takes for a savings bond to mature will vary depending on the current interest rate being paid.
In addition to paying interest, Series EE bonds have tax advantages. Interest is exempt from state and local taxes, and you do not pay federal income tax on the earnings until the bonds are redeemed. Funds from Series EE bonds may be exempt from federal income tax if the funds are used to pay tuition and fees at a college, university, or qualified technical school. This benefit is designed to assist low- and middle-income households. People with incomes above a certain amount do not qualify.
Another type of savings bond is the I bond . These investments pay an interest rate that changes with inflation. I bonds are purchased at face value, a $50 bond costs $50.
Other Federal SecuritiesThe federal government also borrows using Treasury bills and notes. The difference between these debt securities is the length of time to maturity. Treasury bills, or T-bills , involve short-term borrowing with maturities from 91 days to one year. Treasury notes, or T-notes , have maturities from 1 to 10 years.
The U.S. government also issues treasury bonds, called T-bonds . These involve long-term borrowing, with a maturity of up to 30 years.
Municipal BondsA city may want to build a new park or new school. A state may need funds to build or repair highways and bridges. Bonds issued by local and state governments are called municipal bonds , or munis.
Municipal bonds often have an advantage over bonds issued by companies. Usually, interest earned on municipal bonds is exempt from federal and most state income taxes. In order to avoid taxes, people buy municipal bonds even though the interest rates usually are not as high as the rates offered on corporate bonds. In general, most municipal bonds are considered safer investments than corporate bonds.
U.S. Savings BondsFor people with small amounts of money to invest, U.S. savings bonds are a safe investment. Series EE savings bonds come in denominations ranging from $50 to $10,000.
A Series EE bond is bought at half its face value. A $50 bond costs $25. At the end of its full term, it pays at least $50. The difference between the purchase price and the redemption value is the interest earned. The length of time the bond is held determines the amount of interest. The time it takes for a savings bond to mature will vary depending on the current interest rate being paid.
In addition to paying interest, Series EE bonds have tax advantages. Interest is exempt from state and local taxes, and you do not pay federal income tax on the earnings until the bonds are redeemed. Funds from Series EE bonds may be exempt from federal income tax if the funds are used to pay tuition and fees at a college, university, or qualified technical school. This benefit is designed to assist low- and middle-income households. People with incomes above a certain amount do not qualify.
Another type of savings bond is the I bond . These investments pay an interest rate that changes with inflation. I bonds are purchased at face value, a $50 bond costs $50.
Other Federal SecuritiesThe federal government also borrows using Treasury bills and notes. The difference between these debt securities is the length of time to maturity. Treasury bills, or T-bills , involve short-term borrowing with maturities from 91 days to one year. Treasury notes, or T-notes , have maturities from 1 to 10 years.
The U.S. government also issues treasury bonds, called T-bonds . These involve long-term borrowing, with a maturity of up to 30 years.
CORPORATE BONDSInvesting in the bonds of a company is quite different from investing in stock. When you invest in stock, you become an owner. When you buy a bond, you are lending money to the company. Bonds issued by corporations are corporate bonds .
Bond ComponentsEach bond has a face value , also called the maturity value . This is the amount being borrowed by the corporation issuing the bond. Corporate bonds are issued for $1,000 and $25,000, and sometimes higher amounts.
Interest is paid to the investor periodically (usually twice a year) based on the face value and the stated interest rate. On the bond's maturity date, the face value is repaid to the investor.
Bond ValuesBonds are bought and sold in the bond market. The market value of a bond varies based on changing interest rates and the credit rating of the borrowing organization.
Bond values are reported similarly to the way stocks are reported. Corporate bond prices are stated in 100s, but the bonds are sold in $1,000 denominations (10 times the listed amount). For example, a bond reported at 100 is selling at its face value—$1,000. A bond selling at 105 has a market value of $1,050.
The price investors are willing to pay for a bond depends upon the stated interest rate. If the bond's stated rate is lower than interest rates on similar bonds, investors will want to buy the bond for less than its face value. If the bond's stated interest rate is higher than interest rates on similar bonds, the seller of the bond will want to receive more than its face value.
Bond ComponentsEach bond has a face value , also called the maturity value . This is the amount being borrowed by the corporation issuing the bond. Corporate bonds are issued for $1,000 and $25,000, and sometimes higher amounts.
Interest is paid to the investor periodically (usually twice a year) based on the face value and the stated interest rate. On the bond's maturity date, the face value is repaid to the investor.
Bond ValuesBonds are bought and sold in the bond market. The market value of a bond varies based on changing interest rates and the credit rating of the borrowing organization.
Bond values are reported similarly to the way stocks are reported. Corporate bond prices are stated in 100s, but the bonds are sold in $1,000 denominations (10 times the listed amount). For example, a bond reported at 100 is selling at its face value—$1,000. A bond selling at 105 has a market value of $1,050.
The price investors are willing to pay for a bond depends upon the stated interest rate. If the bond's stated rate is lower than interest rates on similar bonds, investors will want to buy the bond for less than its face value. If the bond's stated interest rate is higher than interest rates on similar bonds, the seller of the bond will want to receive more than its face value.
MUTUAL FUNDS
Many people who are interested in investing do not have the time or knowledge needed to make wise investment decisions. A mutual fund is an investment fund set up and managed by a company that receives money from many investors. The mutual fund is managed by a professional who uses the investors' money to buy and sell a wide variety of stocks or bonds. The value and income of the investments made determine the value of the mutual fund shares.
Types of Mutual FundsMore than 60,000 different mutual funds are available to investors around the world. These funds have many different objectives. For instance, some emphasize investing in growth stocks, some emphasize stocks that pay high dividends, and some emphasize international stocks. The following list includes some of the main types of mutual funds.
Mutual Fund ValuesMutual fund investors own shares of the mutual fund. The value of each share is based on the total value of all investments made by the mutual fund company. For example, if the investments were worth $400,000 and 80,000 shares existed, each share would be worth $5, $400,000 ÷ 80,000 = $5. This amount is called the net asset value (NAV) of a mutual fund.
A part of the dividends and interest received from the fund's investments is used to pay operating expenses of the fund. The major portion of earnings is distributed to the mutual fund shareholders or reinvested in the fund.
Many people who are interested in investing do not have the time or knowledge needed to make wise investment decisions. A mutual fund is an investment fund set up and managed by a company that receives money from many investors. The mutual fund is managed by a professional who uses the investors' money to buy and sell a wide variety of stocks or bonds. The value and income of the investments made determine the value of the mutual fund shares.
Types of Mutual FundsMore than 60,000 different mutual funds are available to investors around the world. These funds have many different objectives. For instance, some emphasize investing in growth stocks, some emphasize stocks that pay high dividends, and some emphasize international stocks. The following list includes some of the main types of mutual funds.
- Aggressive-growth stock funds seek quick growth, but also have higher risk.
- Income funds specialize in stocks that pay regular dividends.
- International funds invest in stock of companies from around the world.
- Sector funds buy stocks of companies in the same industry such as health care, energy, or telecommunications.
- Bond funds specialize in corporate bonds.
- Balanced funds invest in both stock and bonds.
Mutual Fund ValuesMutual fund investors own shares of the mutual fund. The value of each share is based on the total value of all investments made by the mutual fund company. For example, if the investments were worth $400,000 and 80,000 shares existed, each share would be worth $5, $400,000 ÷ 80,000 = $5. This amount is called the net asset value (NAV) of a mutual fund.
A part of the dividends and interest received from the fund's investments is used to pay operating expenses of the fund. The major portion of earnings is distributed to the mutual fund shareholders or reinvested in the fund.