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by AARP Education & Outreach, April 7, 2009
There are many different types of bonds, but they all share common principles. If you are considering bonds as part of your investment plan, be sure to do your homework. There are three main types of bonds:
These are issued by state and local governments or their agencies to pay for public improvements, reduce debt, or other public purposes. If you buy bonds issued by your home state, you will not have to pay a state income tax or federal income tax (or city tax, if you have one). If you buy bonds issued by another state, you will not have to pay a federal tax, but you will pay a tax to your own state (and city if applicable).
These are issued by corporations that want to raise money for their business ventures, ranging from balancing their cash flow to buying new equipment, building new facilities, or spending on new research.
Interest earned from corporate bonds is taxable, so corporate bonds tend to pay higher rates than government or municipal bonds, which have some tax benefits. Corporate bonds are often considered appropriate investments for the bond portion of your retirement plan investments because you get the higher interest and still aren't taxed until the earnings are withdrawn. Municipal or government bonds will pay you less interest and already offer a tax benefit, so they offer less incentive to include them in your retirement portfolio.
Government bonds are those issued by the federal government or one of its agencies. From a credit perspective, these are the safest of all investments because they're backed by the "full faith and credit" of the U.S. government; so unless the U.S. goes bankrupt, you're guaranteed to get your money back. Common types of U.S. government bonds include Treasuries and savings bonds.
Treasury bills, notes, and bonds are collectively called "Treasuries."
Savings bonds are government bonds that are designed especially for individual investors. As such, they can generally only be redeemed by the original owners (except in limited circumstances). Savings bonds include:
AARP’s Money Matters Tip Sheet on Investing in Bonds has more information and action steps.
All the information presented on AARP.org is for educational and resource purposes only. We suggest that you consult with your financial or tax adviser with regard to your individual situation. Use of the information contained in this Web site is at the sole choice and risk of the reader.
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