What Are the Different Types of Bonds? | American Funds

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Investing Fundamentals

What Are the Different Types of Bonds?

The bond market is diverse, with a variety of opportunities for investors to preserve capital, generate income and even see their assets grow over time.

Bonds are debt securities similar in function to IOUs. Governments, agencies and companies all issue bonds, in essence taking out a loan for a specified amount of time. The bondholder receives periodic fixed payments — called coupons — until the issuer repays the bond in full. A handful of bonds, called zero-coupon bonds, do not pay periodically, but are issued at a deep discount to face value and are ultimately repaid at face value.

Bond payments are based on the terms of the issue, among which are duration of the bond, the interest rate environment and credit ratings. Independent ratings agencies determine the creditworthiness of bond issuers, assigning each issuer a rating (however, not all bonds are rated). The interest rate environment at the time of issuance also plays a role in determining bond payments; however, changes in rates or credit ratings don’t change the payments once established. Changes in rates or credit ratings do, however, affect the value of the bonds after they’re issued.

Bond Types

Below are the different types of bonds available to the majority of investors.

U.S. Treasuries

U.S. Department of the Treasury

Highly rated, backed by the full faith and credit of the U.S. government.

Corporate

Various companies

Bond rating depends on company’s solvency and prospects.

Mortgage-backed

Government agencies, non-governmental enterprises, some banks

Bonds issued against a pool of existing mortgages; many agency mortgages from government agencies and non-governmental entities are backed by the U.S. government.

Municipal bonds

U.S. state and local governments

Ratings depend on fiscal health of issuer; income from these bonds is often free of federal tax and some state taxes as well, depending on the issuer.

Asset-backed

Banks and companies

Bonds issued against a pool of loans, such as auto loans or credit cards.

Sovereign

Non-U.S. governments

Bonds issued by foreign governments; may be in dollars or local currency.

EMERGING MARKETS BONDS

Developing-country governments and corporates

Issued by governments, government-related entities and corporates in emerging markets across the world, mostly in dollars or local currency.

High-yield

Various companies

Also known as ”junk bonds,” these are issued by companies with low credit ratings. While they generally offer a higher yield than investment-grade bonds, high-yield bonds also carry a higher risk of default.


Investments are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity, so they may lose value.

Investors should carefully consider investment objectives, risks, charges and expenses. This and other important information is contained in the fund prospectuses and summary prospectuses, which can be obtained from a financial professional and should be read carefully before investing. 

The return of principal for bond funds and for funds with significant underlying bond holdings is not guaranteed. Fund shares are subject to the same interest rate, inflation and credit risks associated with the underlying bond holdings. 

Statements attributed to an individual represent the opinions of that individual as of the date published and do not necessarily reflect the opinions of Capital Group or its affiliates. This information is intended to highlight issues and not to be comprehensive or to provide advice.