If you are interested in investing but are
wary of stocks or are simply looking to diversify the asset classes in
your portfolio, debt securities may be worth considering. To use a simplified example,
a debt security is essentially an I.O.U. As an investor, you
lend money to an issuer for these securities and the issuer, in turn,
agrees to repay the debt at a later date, often along with any accrued interest. There
are several types of debt securities to be aware of. Let’s explore
them, beginning with the U.S Government securities. These securities are backed by the full faith
and credit of the United States Government. Savings bonds and U.S.
treasury issues, such as treasury bills, notes, bonds and treasury inflation-protected securities
or TIPS, are included in this category. Government agency
issues are debt securities issued by U.S government agencies and
corporations. Some better known agencies include the Federal National Mortgage Association,
also known as FANNIE MAE; the Federal Home Loan Mortgage Corporation,
or FREDDIE MAC; the Federal Agricultural Mortgage Corporation, or
FARMER MAC; and the Government National Mortgage Association or GINNIE MAE, which is the only
agency fully backed by the U.S government. Municipal bonds are securities issued by cities,
states, and school districts, and other such entities to fund
public projects. Some of these bonds may be tax advantaged, such as being free from federal
income tax. There are two types of municipal issues. General obligation
bonds, often issued for public utilities, are backed by the taxing
authority of the issuer. Revenue bonds are typically backed by fees associated with the
use of the funded project, like a public airport. Finally, corporate bonds are issued by corporations
to build capital and are backed by the credit of the issuer.
As a result, a corporation’s ability to repay their investors is strongly tied to
its success. As with all securities, it’s important to
understand the risks of bond investing such as ‘call risk’- or the chance
your bond will be bought back by the issuer prior to the maturity date – and ‘default
risk’ – or the potential that the issuer goes bankrupt and you lose your
investment. Evaluating your current and future liquidity needs,
investment horizon, and risk tolerance will help you determine which investments are right
for you. To learn more about this and other investment topics, subscribe
to the Zions Direct YouTube channel.