Bonds are loans made to large organizations. These include corporations, cities, and national governments. An individual bond is a piece of a massive loan. That’s because the size of these entities requires them to borrow money from more than one source. Bonds are a type of fixed-income investment. The other types of investments are cash, stocks, commodities, and derivatives.
There are many different types of bonds. They vary according to who issues them, length until maturity, interest rate, and risk.
U.S. Treasury Direct debt obligations issued by the U.S. government, which uses the revenue from the bonds to raise capital and/or make payments on outstanding debt
Agency Debt obligations issued by agencies of the U.S. federal government or by private agencies, called government-sponsored enterprises (GSEs), which are federally chartered, but publicly owned by their stockholders
Municipal Debt obligations issued by states, cities, counties, and other public entities that use the loans to fund public projects, such as the construction of schools, hospitals, highways, sewers, and universities
Corporate Fully taxable debt obligations issued by corporations that fund capital improvements, expansions, debt refinancing, or acquisitions that require more capital than would ordinarily be available from a single lender
High yield Debt securities rated below investment grade2 based on the issuer's weaker ability to pay interest and capital, resulting in the issuer paying a higher rate to entice investors to take on the added risk
Bonds Trading Strategy
Trading bonds can be as passive or active as you like. No matter your approach to this investment, there are 3 tiers of strategies to get you started.
Buy and hold If you’re looking for a passive strategy, start with buy and hold. You simply buy a bond and hold onto it until it reaches maturity. Holding the bond until maturity is a good way to maximize the income generated while minimizing costs.
Bond laddering If you want to be more active, bond laddering is a good place to begin. With this strategy, you’ll own multiple bonds with various maturities. When a shorter-term bond matures, use the proceeds to buy a longer-term bond. This can provide an income stream while you maintain a low-cost strategy.
Swapping This is a more active approach popular among more experienced traders. You must sell a losing bond to get a tax write-off for the loss and reinvest that money in another bond. You get rid of a bond that isn’t likely to recover and buy higher-yielding bonds to build a stronger portfolio.