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Unformatted text preview: e many choices when investing in bonds, but bonds are classified into four main types: Treasury, corporate, municipal, and foreign. Each type differs with respect to expected return and degree of risk. Treasury bonds, sometimes referred to as government bonds, are issued by the federal government. It is reasonable to assume that the federal government will make good on its promised payments, so these bonds have no default risk. However, Treasury bond prices decline when interest rates rise, so they are not free of all risks. 59
59 Classification of Bonds Corporate bonds, as the name implies, are issued by corporations. Unlike Treasury bonds, corporate bonds are exposed to default risk—if the issuing company gets into trouble, it may be unable to make the promised interest and principal payments. Different corporate bonds have different levels of default risk, depending on the issuing company’s characteristics and on the terms of the specific bond. Default risk is often referred to as “credit risk,” and, the larger the default or credit risk, the higher the interest rate the issuer must pay.
60 Classification of Bonds Municipal bonds, or “munis,” are issued by state and local governments.
Like corporate bonds, munis have default risk. However, munis offer one major advantage over all other bonds: the interest earned on most municipal bonds is exempt from federal taxes and also from...
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