VBC Securities, LLC

A bond represents the indebtedness of their issuer. A bond is any interest-bearing or discounted government or corporate security that obligates the issuer to pay the bondholder a specified sum for the use of the money, usually at specific intervals, and to repay the principal amount of the loan at maturity. 

 

The fixed income element of a bond refers to the payments by the issuers of interest on the loan at a fixed rate and fixed intervals until the bonds mature or the loan is paid. Bondholders have an IOU from the issuer but no corporate ownership privileges like stockholders.

 

Treasury bonds are negotiable debt obligations of the U.S. government that are:

• secured by its full faith and credit

• issued with maturities of 10 years or longer

• minimum denominations of $1000

• tax-exempt by state and local governments

• taxable by federal government

 

Corporate bonds are debt obligations of a private corporation. Corporate bonds are typically:

• taxable

• have a par value of $1000

• have a term maturity meaning they come due all at once

• traded on major exchanges with price published in the media

 

U.S. government agency bonds are debt obligations issued by government-sponsored enterprises (GSEs) or U.S. government agencies like GNMA. GSEs are independent organizations sponsored by the federal government and established with a public purpose.

 

Federal Agency bonds:

• issued in $1,000 denominations

• backed by the full faith and credit of the U.S. government

• interest income generally subject to federal and state taxes

• certain interest income exempt from state taxes

 

GSE bonds:

• issued in $1,000 denominations.

• not guaranteed by the U.S. government

• obligation of the issuer

• greater credit risk than U.S. Treasury securities

• certain interest income exempt from state taxes

 

Municipal bonds are debt obligations of a state or local municipality used to fund general governmental needs or special projects.  General obligation bonds are repaid from general revenues derived from the issuer’s taxing power.  Revenue bonds are repaid by revenues generated by the facilities built, like a bridge or a sewer system.

 

Public purpose muni-bonds are typically:

• tax-exempt from federal income tax

• generally tax-exempt in the issuing state and/or municipality

 

Private purpose muni-bonds are typically:

• taxable

• if tax-exempt, may be subject to Alternative Minimum Tax

 

• All bond prices can rise or fall depending on interest rates. Interest rate changes generally have a greater effect on long-term bond prices.

• All bonds carry risk that the issuer will default or be unable to make timely payments of interest and principal. However, Treasuries carry minimal risk since they are backed by the full faith and credit of the U.S. government.  GSE (government sponsored enterprises) debt is solely the obligation of the issuer and carries greater credit risk than U.S. Treasury securities.  Generally, lower rated bonds carry more credit risk.  

• Some of all bonds have call provisions that allow the issuer to redeem the bonds prior to the stated maturity date. Issuers typically call bonds during periods of declining interest rates. 

• Some corporate and municipal bonds have sinking fund provisions which require the issuer to periodically retire a predetermined number of bonds. 

• Certain municipal bonds, including housing bonds and certificates of participation, may be callable at any time at the issuer’s discretion, despite specific stated call dates.  This provision is noted in the security description as “extraordinary calls” or “subject to extraordinary redemption.” 

• Some corporate bonds have a “make-whole” call provision, which allows the issuer to redeem the outstanding bonds prior to maturity at a price determined by a formula described in the prospectus. 

• Certain events can impact a corporate, municipal, GSE or agency issuers’ financial situation and ability to make timely payments to bondholders, including economic, political, legal or regulatory changes and natural disasters. Event risk is unpredictable and can significantly impact bondholders. 

• All bonds sold prior to maturity may be subject to substantial gain or loss. The secondary market may also be limited.