We have pretty much covered the basics of savings and investments in the past, and delved into several types of securities where one can put some of his cash to earn interest and capital gains. Stocks, as we have learned, provide stockholders with an equity stake in the issuing company, which means stockholders are co-owners. While stock is the most volatile form of security, it potentially offers the highest rate of return, following the financial principle that the greater the risks, the greater the rewards.

While stocks get the biggest attention in the world of finance, making it the most famous form of investment, there are other securities worth noting. Bonds, for example, don’t give as much appeal as stocks, but offer quite an attractive rate of return and provide some form of security and fallback when stocks seem to be failing on you. During a bearish market, bonds’ yields would seem negligible, but during a bullish market, bonds can offer some lucrative gains more than stocks.

What exactly are bonds?

As discussed, stocks offer stock holders equity shares or ownership in an issuing corporation. Bonds, on the other hand, offer bond holders creditor stake in the issuing entity. Simply put, stocks represent ownership and bonds represent debt.
Companies and even governments issue bonds to fund their operations with the understanding, under a contract, that the bond will be repaid with interest at fixed intervals until a specified maturity date.
To illustrate how bonds generally work, let’s take the case of fictional company XYZ. Suppose XYZ is looking to expand its operations overseas, and needs about $150,000,000. After figuring out that issuing bonds is the best option for them versus issuing stocks, one or more underwriting or securities firms will buy the entire issue of company XYZ bonds and resell them to investors. This way, company XYZ can collect the full proceeds of the sale amounting to $150,000,000, and the risk of not being able to sell the bonds to investors rests on the underwriting or securities firms. Company XYZ can then use the proceeds to fund their expansion, from where they can draw the amount necessary to pay off the interests and the principal amount owed to the bond holders which have to be returned in 20 years.
There are different types of bonds for investors to choose from depending on their investment preferences. Government-issued bonds, especially those by the United States, are classified into three main categories:

• Bills
• Notes
• Bonds

Bills are bonds that mature in less than one year. Notes, on the other hand, are bonds that mature in one to 10 years, while ‘government’ bonds mature in more than 10 years. Generally, government-issued debts or bonds are regarded as the safest form of bonds, giving investors a virtually risk-free, fixed income investment.

Municipal bonds, often referred to as ‘munis,’ are issued by local or city governments. Proceeds from the sale of munis are being used by local governments to fund the city’s projects such as infrastructure. Munis are ideal for those who seek tax shelters, as municipal bonds are free from federal taxes.

Find out more about bonds here.