FIXED-INCOME CAPITAL MARKET INSTRUMENTS (BONDS) A bond is an interest-bearing security that obligates the issuer to pay the bondholder

a specified sum of money, usually at specific intervals (known as a coupon), and to repay the principal amount of the loan at maturity. Zero-coupon bonds pay both the imputed interest and the principal at maturity. In the U.S. government, as well as in various other governments, bonds are classified according to the length of the period before maturity of the bond. The three categories are "Bills", which mature in less than one year, 'Notes', which mature between one and ten years after the purchase date, and 'Bonds', a somewhat confusing choice for a label classifying all government bonds maturing over ten years after the purchase date. Investing in government bonds of developed countries such as the U.S. is generally considered relatively safe whereas buying bonds in a developing country carries considerably more risk. CORPORATE BOND A corporate bond is a fixed-income instrument issued by a corporation to raise money for expansion or other business needs. Corporate bonds typically refer to long-term debt instruments that possess a maturity date at least a year after the date in which they are issued. Corporate debt that matures in less than one year typically is called commercial paper. Corporate bonds typically pay a higher rate of interest than federal or municipal government bonds, but the interest earned is generally fully taxable. These bonds are considered higher risk than government bonds. As a result, interest rates are almost always higher on corporate bonds. There are a couple of variations of corporate bonds of which you should be aware. "Convertible" bonds, offered by some corporations, can be converted into stock by the bond holder. 'callable' bonds offer the company the option of redeeming the bond before the maturity date; note that callable bonds are no longer strictly fixed-income investments. MUNICIPAL BONDS A debt security issued by a state, municipality or county to finance its capital expenditures. Municipal bonds are exempt from federal taxes and from most state and local taxes, especially if you live in the state in which the bond is issued. Municipal bonds may be used to fund expenditures such as the construction of highways, bridges or schools. "Munis" are bought for their favorable tax implications, and are popular with people in high income tax brackets.

GOVERNMENT AGENCY BONDS A bond, issued by a U.S. government-sponsored agency. The offerings of these agencies are backed by the U.S. government, but not guaranteed by the government since the agencies are private entities. Such agencies have been set up in order to allow certain groups of people to access low cost financing, especially students and first-time home buyers. Agency bonds are usually exempt from state and local taxes, but not federal tax.

TREASURY BONDS A negotiable, coupon-bearing debt obligation issued by the U.S. government and backed by its full faith and credit, having a maturity of more than 7 years. Interest is paid semi-annually. Treasury bonds are exempt from state and local taxes. These securities have the longest maturity of any bond issued by the U.S. Treasury, from 10 to 30 years. Treasury bonds pay interest every 6 months at a fixed coupon rate. TREASURY INFLATION PROTECTED SECURITIES TIPS TIPS are a special type of treasury bond that is designed to protect investors from inflation. TIPS are bonds issued by the US Treasury whose principal and coupon interest payments fluctuate along with inflation. More exactly, the principal value and coupon interest payment on a TIPS fluctuates along with changes in the Consumer Price Index, which is how inflation is measured.

EURO BONDS A bond issued in the international bond market rather than as a domestic issue. Eurobonds are issued by multinational corporations. Eurobonds are attractive to investors as they have small par values and high liquidity. A eurodollar bond that is denominated in U.S. dollars and issued in Japan by an Australian company would be an example of a eurobond. The Australian company in this example could issue the eurodollar bond in any country other than the U.S.