Learn About The Different Kinds of Bonds, Their Characteristics and The Market

What are the different types of bonds? Some of the characteristics of those bonds, and what you need to know when we start to talk more about the bond market. Hi, I’m Troy Sharpe, CEO of Oak Harvest Financial Group, CERTIFIED FINANCIAL PLANNER™ Professional (CFP®), host of The Retirement Income Show, and author of the upcoming book Core 4.

Bonds have been on a bull run for many years. I want you to comment down below whether that run where bonds have been going up in value, has it been 10 years, 20 years, or 30 years? Write the comment down below, I want to see what most of you think.

There are three main categories of bonds. You have corporate bonds, municipal bonds, and also United States government bonds. I want to talk a little bit about them, some of the differences and some of the similarities, and help you continue this primer in this series about bonds. First, I wanted to start with United States government bonds. United States government bonds, these are the safest of all bonds in the entire world. When markets get tumultuous, when there’s economic uncertainty, people, large institutions, wealthy investors, their money flows into United States government bonds. T

hese are, across the world, known as the safest asset class out there for you to invest in. The typical maturities are 2 years, 10 years, and 30 years. Now, right now, interest rates are so low that you could loan your money to the United States government for 30 years and you’re going to make around 2% interest. That’s not really a good deal, but rich investors, institutional investors, they put money into the United States government bonds because they are one of the safest tools out there for you to place your money in, but you’re not going to earn a lot of interest on these tools in this type of environment.

Now, you have corporate bonds. Corporate bonds are when you loan money to a corporation, like we talked about in the last video. They have varying maturities, and you can either buy them at premiums or discounts, you can buy them when they’re issued, or when they’ve been on the market for some time, but the two things you need to know is, are you buying an investment-grade bond which is high-quality?

Which means the company has plenty of cash, plenty of profits, low debt and they’re very, very likely to be able to pay you your interest and return your principal when the bond matures. Then you have junk bonds, which are also known as high-yield bonds. They pay higher interest rates and they’re more likely to default. Junk bonds range in ratings from double B and below. Your B-rated, your C-rated, your D-rated bonds— please don’t buy any D-rated bonds because they’re very likely to default, which means you’ll lose all your money, but the higher, we call this “credit quality,” the bond is, the lower, generally speaking, your interest rate that they will pay you is If it’s very safe to loan your money to a corporation, the corporation doesn’t have to pay you as much interest, but if it’s risky for you to loan money to that corporation, well, they have to incentivize you with a higher interest rate, so be careful which types of bonds, if you’re in the market, looking for them. Are they investment grade or are they junk bonds, otherwise known as high-yield bonds?

Then we have municipal bonds. Municipal bonds are bonds that are issued from a city or a state. They are 100% Federal income tax-free. Now, they generally are two different types. Your general obligation municipal bonds, this is when you loan money to a city or a state and they simply have a promise to pay you back. Now, some cities, some states are more financially solvent than others, so you want to be very careful where you’re buying your bonds from, your municipal bonds.

The cities and states that are more risky are going to pay higher interest rates because they’re more risky, but that the truth of the matter is there are some cities and some states in this country I would never loan my money to because they don’t have the capacity, I believe and many experts also, to fulfill those promises down the road. There’s going to be some troubles there with the financial solvency of those cities and states. Now, the more secure municipal bonds are the revenue bonds. Let’s say your city wants to build a tollway. They may issue a bond, which means they’re going to ask for money, you’re going to loan them the money, and in exchange, they’re going to build a tollway.

Those bonds are going to be repaid, the interest will be paid and the bonds will be paid back in full, based on the revenue generated from that tollway. It’s a much more secure type of municipal bond. These are the three types. We have Federal US government bonds, which are not tax-free. They’re subject to taxes on your Federal income tax return. You have corporate bonds, which also are not tax-free. They’re subject to income taxes. Then you have municipal bonds which are, Federally, income tax-free. If you commented below about how long this bull market has been, the answer to that question is about 30 years.

Bonds have been going up in value for 30 years, and as bonds go up in value, interest rates come down. That’s why all of these bonds here, they do pay very low interest rates because we’re in a very low interest-rate environment. The bond bull market has lasted for about 30 years.

If you like this video, make sure to hit that thumbs-up icon down below to like the video. Also, subscribe to the channel and hit that little bell icon so you can be notified whenever we upload new content like this and continue connecting you to your money and helping you create a solid base and foundation of investing knowledge to help you grow and build wealth. Also, share this video with a friend or family member if you think they’ll find it valuable to help them get more connected to their money.