Treasuries, Corporate Bonds, and Munis

Why this matters

"Bonds" covers a wide range, from loans to the US government to loans to struggling companies. Two bonds can have similar maturities and very different chances of paying you back, and very different tax bills. Knowing the main issuers is the first step to knowing what kind of risk you're actually taking.

Treasuries

Treasury securities are issued by the US Treasury to fund the federal government. They come in three main forms, named by how long they last:

• Treasury bills mature in 4 to 52 weeks. They're sold at a discount or at face value, and you receive face value at maturity: the difference is your interest.¹
• Treasury notes mature in 2, 3, 5, 7, or 10 years and pay fixed interest every six months.²
• Treasury bonds mature in 20 or 30 years and also pay fixed interest every six months.³

Interest on Treasuries is subject to federal income tax but exempt from state and local income taxes.² Investors generally treat Treasuries as having very low credit risk. Like any fixed-rate bond, though, they still carry interest rate risk, and long-term Treasuries can fall sharply when rates rise.⁴

Corporate bonds and credit ratings

A corporate bond is a loan to a company. Because a company is more likely than the federal government to fail to pay, corporate bonds generally pay higher interest. How much higher depends on how risky the company is, and that's where credit ratings come in.

A credit rating is a rating agency's assessment of how likely a borrower is to repay. Bonds rated BBB or higher by S&P and Fitch, or Baa3 or higher by Moody's, are considered investment grade. Bonds rated below that are called speculative grade, high yield, or "junk." They generally pay higher interest to compensate investors for a greater risk of default.⁵

Ratings are useful, but they're an opinion at a point in time. A high rating doesn't mean a bond has no chance of defaulting, and ratings can change.⁶

The rest of this lesson is for members

Still to come in this lesson: Municipal bonds, the key takeaways, and 2 quiz questions with explanations.

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