A bond is a loan an investor makes to an organization in exchange for regular interest payments over a specific period of time. At the end of that period, known as its maturity date, the loan is repaid in full. A key differentiator as to whether a bond investment is safe or risky depends on to whom the loan is made.
Treasuries are considered the safest bonds available because they are backed by the “full faith and credit” of the U.S. government. They are quite liquid because certain primary dealers are required to buy Treasuries in large quantities when they are initially sold and then trade them on the secondary market. Treasuries also are more affordable than other types of bonds; you can buy one for as little as $100. Investors can purchase Treasuries through brokerage firms, banks or the Treasury Direct website.
A treasury bond with a maturity of one year or less is called a Treasury bill, or T-bill. A maturity between two and 10 years is a Treasury note, or T-note. The term Treasury bond generally refers to long-term maturities of 10 to 30 years from their issue date.
Other types of government bonds include those issued or guaranteed by U.S. federal government agencies and those issued by government-sponsored enterprises, which are corporations created by Congress for public use. GSEs include the Federal National Mortgage Association (Fannie Mae), the Federal Home Loan Mortgage (Freddie Mac) and the Federal Agricultural Mortgage Corp. (Farmer Mac). Agency bonds are backed by the U.S. government, but GSE bonds do not enjoy quite the same guarantee and therefore pose greater credit risk.
Next on the bond risk spectrum are municipal bonds (muni bonds), which are issued and guaranteed by individual states, cities, counties and other government entities. These bonds use loan funds to build roads, schools and other public projects. The guarantee for muni bonds is made by the issuer, so while they are relatively secure because they come from government issuers, their level of risk varies depending on the financial stability of the backing agency.
Next on the risk spectrum are corporate bonds, which are issued by all types of companies in order to raise money for capital expenditures, operations and acquisitions. They work just like government bonds and, should the issuer claim bankruptcy before the principal is repaid, bondholders are positioned toward the front of the line for at least a partial repayment. Corporate bonds are generally categorized as either investment grade or non-investment grade, which refers to how risky they are. Investment grade bonds are generally lower risk, but non-investment grade bonds – also referred to as high yield or junk bonds – tend to pay out higher interest to compensate for that risk.
While global diversification can be a good risk mitigation strategy for some investors, international bonds are considered more risky than domestic bonds, and emerging markets bonds are considered the most risky. Because these bonds are issued by foreign governments and companies, the risk varies by issuer and is impacted by political, cultural, environmental and economic factors. Furthermore, foreign bonds expose investors to currency risk, which means the value of payments can fluctuate once funds are converted to U.S. dollars.
FAQs
Treasury Bonds
They have a maturity of 10, 20, or 30 years. These bonds are backed by the U.S. and, therefore, are regarded as very safe. Due to their low risk, they offer lower yields than other types of bonds.
Which of the following bond types is safest? ›
Final answer: U.S. Treasury bonds are the safest in terms of default risk due to the government's financial stability. Start-up technology company bonds pose higher default risk. Investors commonly choose Treasury bonds for low default risk.
Which type of bond is the safest quizlet? ›
Government bonds are considered one of the safest types of investments because they are backed by the government. Although government bonds do not pay high interest rates, they are safe and a good investment for individuals who cannot afford to risk losing their investment.
Which bond would be the safest credit risk? ›
GOVERNMENT BONDS
Intermediate-term bonds mature in three to 10 years, whereas long-term bonds generally mature in 10 to 30 years. Risk Considerations: Among the lowest risk of all bond investments, these bonds have low credit risk because they are backed by the full faith and credit of the U.S. government.
What are the safest bonds right now? ›
Treasurys are generally considered "risk-free" since the federal government guarantees them and has never (yet) defaulted. These government bonds are often best for investors seeking a safe haven for their money, particularly during volatile market periods. They offer high liquidity due to an active secondary market.
Which bond is more secure? ›
Investment Grade Bonds
Higher-rated bonds, investment-grade bonds, are safer and more stable investments tied to corporations or government entities. Investment-grade bonds contain “AAA” to “BBB-“ ratings.
Which of the following is the safest bond rating? ›
An investment-grade bond is a so-called high-quality or low-risk bond. It is considered to be a fairly safe bet and has a very low rate of default. Bonds rated "AAA," "AA," "A," and "BBB" are considered investment grade.
What bond has the least risk? ›
Bonds issued by the U.S. Treasury are backed by the full faith and credit of the U.S. government and therefore considered to have no credit risk.
What are the best secure bonds? ›
Invest in safer portfolio without compromising returns.
| Bond name | Rating |
|---|
| 8.85% BAJAJ FINANCE LIMITED INE296A07QT9 Secured | CRISIL AAA |
| 13.50% DVARA KSHETRIYA GRAMIN FINANCIAL SERVICES PRIVATE LIMITED INE179P07118 Secured | CARE WITHDRAWN |
| 6.43% HOUSING DEVELOPMENT FINANCE CORPORATION LTD INE001A07SR3 Secured | CRISIL AAA |
17 more rowsIn chemistry, a covalent bond is the strongest bond, In such bonding, each of two atoms shares electrons that bind them together. For example - water molecules are bonded together where both hydrogen atoms and oxygen atoms share electrons to form a covalent bond.
Junk bonds are a type of high-yield corporate bond that are rated below investment grade. While these bonds offer higher yields, junk bonds are named because of their higher default risk compared to investment grade bonds.
What makes a bond safe? ›
Some agency bonds are fully backed by the U.S. government, making them almost as safe as Treasuries. Because mortgages can be refinanced, bonds that are backed by agencies like GNMA are especially susceptible to changes in interest rates.
What type of bond is the safest? ›
Treasuries are considered the safest bonds available because they are backed by the “full faith and credit” of the U.S. government.
Which bond is the strongest? ›
So, in conclusion the ionic bonds are strongest among ionic, covalent and hydrogen bonds.
What is the most risk free bond? ›
Specifically, these financial institutions look at a government's lending and repayment history, the level of outstanding debt and the strength of its economy. U.S. Treasury bonds (T-bonds) are often touted as risk-free investments.
What type of bond has the least risk? ›
Investment grade bonds are generally lower risk, but non-investment grade bonds – also referred to as high yield or junk bonds – tend to pay out higher interest to compensate for that risk.
What type of bond rating is the best? ›
Either way, bond ratings are scaled differently depending on the rating agency, and it's important to know the similarities and differences across rating firms. For Standard & Poor's, AAA is the best rating, followed by AA, A, BBB, BB, B, CCC, CC, and C.
