The main types of bonds are grouped along five axes: who issued them, how they pay interest, whether they carry embedded options, what secures them and how creditworthy the issuer is, and how they’re taxed. Maturity sits alongside these as a sixth practical dimension. A 30-year corporate zero-coupon bond and a 2-year Treasury note are both “bonds,” but they behave so differently in a portfolio that treating them as the same instrument would be a mistake. Each classification below changes the risk you take and the yield you earn for taking it.
Bonds Grouped by Issuer
The issuer tells you who owes you money and how likely they are to pay it back. That answer drives almost everything else about the bond’s pricing.
U.S. Treasury Securities
Treasury securities are debt issued by the federal government, backed by its full faith and credit. They carry the lowest default risk of any bond in the global market because the U.S. government has the power to tax and, ultimately, to print the currency in which these obligations are denominated.
Treasury Bills (T-Bills) mature in one year or less and pay no periodic interest. You buy them at a discount and receive the full face value at maturity, and the difference is your return.1TreasuryDirect. Treasury Bills In Depth Treasury Notes (T-Notes) have maturities of 2, 3, 5, 7, or 10 years and pay interest every six months. Treasury Bonds (T-Bonds) are the longest-term option, issued in 20-year and 30-year maturities, also paying semiannual interest.2TreasuryDirect. Understanding Pricing and Interest Rates
Government-sponsored enterprises like Fannie Mae and Freddie Mac issue agency bonds to support the mortgage market.3Federal Housing Finance Agency. Treasury and Federal Reserve Purchase Programs for GSE and Mortgage-Related Securities Agency debt carries an implicit government guarantee rather than the explicit full-faith-and-credit backing Treasuries enjoy, so agency bonds pay slightly higher yields to compensate for that extra sliver of uncertainty.
Municipal Bonds
Municipal bonds are issued by state and local governments to fund public infrastructure like schools, highways, and water treatment plants. Their main appeal is favorable tax treatment, covered below. Credit risk depends on what backs the repayment promise.
General Obligation (GO) bonds are secured by the issuing government’s taxing power. If revenue falls short, the municipality can raise taxes to cover its debt payments. Revenue bonds, by contrast, rely solely on income from the specific project they financed. A toll road revenue bond gets repaid from toll collections, and if traffic falls short of projections, bondholders bear the consequences. Revenue bonds from the same municipality will almost always carry higher yields than its GO bonds because the repayment source is narrower.
Corporate Bonds
Corporations issue bonds to raise capital for expansion, refinancing, or general operations. Credit quality varies enormously. A bond from a dominant, cash-rich company behaves nothing like one from a leveraged startup. Corporate bonds sit lower in the safety hierarchy than government debt because companies lack taxing authority and face real bankruptcy risk.
Within a single company’s capital structure, seniority matters. Senior debt gets paid first if the company liquidates. Subordinated debt stands behind senior creditors in line. That priority ranking is a major determinant of what a corporate bond actually yields.
Bonds Grouped by Interest Payment Structure
How a bond pays you shapes your cash flow, your tax picture, and how the bond’s price reacts to interest rate shifts.
Fixed-Rate Bonds
The fixed-rate bond is the default. You receive the same coupon payment, typically every six months, from the day you buy until maturity. The appeal is predictability. The trade-off is price sensitivity to interest rates. When market rates rise above your coupon, your bond’s price drops because new buyers can get better yields elsewhere. When rates fall, your bond’s price climbs. This inverse relationship between price and yield is the central mechanism of bond investing.
Floating-Rate Bonds
Floating-rate bonds periodically reset their coupon to track a benchmark rate. The Treasury Department issues Floating Rate Notes (FRNs) that pay interest quarterly, with the rate tied to the most recent 13-week T-Bill auction rate and reset weekly.4TreasuryDirect. TreasuryDirect – Floating Rate Notes Corporate floaters more commonly reference the Secured Overnight Financing Rate (SOFR).
Because the coupon adjusts to match prevailing rates, a floating-rate bond’s market price stays relatively stable near face value. That stability comes at a cost: you sacrifice the potential price gains that fixed-rate bonds enjoy when rates fall. Floaters are a defensive position, useful when you expect rates to rise or stay volatile.
Zero-Coupon Bonds
Zero-coupon bonds make no interest payments during their life. You buy them at a steep discount to face value and collect the full face value at maturity. A zero-coupon bond with a $1,000 face value might cost $600 today, and the $400 difference is your total return spread over the bond’s term.
The catch is taxes. Even though you receive no cash until maturity, the IRS requires you to report a portion of that built-in gain each year as income. The tax code calls this original issue discount (OID), and it accrues based on the bond’s yield calculated at issuance.5GovInfo. 26 USC 1272 – Current Inclusion in Income of Original Issue Discount You owe tax on money you haven’t received. For that reason, zeros work best inside tax-advantaged accounts like IRAs or 401(k)s. Tax-exempt bonds, savings bonds, and short-term instruments with maturities of one year or less are exempt from the OID accrual rules.6Internal Revenue Service. Publication 550 (2025), Investment Income and Expenses
Treasury Inflation-Protected Securities (TIPS)
TIPS are Treasury debt designed to protect your purchasing power against inflation. The coupon rate is fixed, but the principal amount adjusts up or down based on changes in the Consumer Price Index for All Urban Consumers (CPI-U). Because interest is calculated on the adjusted principal, your semiannual payments grow when inflation rises and shrink during deflation.7TreasuryDirect. Treasury Inflation-Protected Securities (TIPS)
TIPS are issued in 5-year, 10-year, and 30-year terms.8TreasuryDirect. Glossary of Terms At maturity, you receive the inflation-adjusted principal or the original face value, whichever is greater. That deflation floor means you can never get back less than you started with.7TreasuryDirect. Treasury Inflation-Protected Securities (TIPS) Like zero-coupon OID, the annual inflation adjustment to TIPS principal is taxable each year even though you don’t receive the cash until maturity, making TIPS another candidate for tax-sheltered accounts.
Bonds with Embedded Options
Some bonds come with built-in features that let either the issuer or the investor change the deal before maturity. The party holding the option gains flexibility at the other party’s expense, and the pricing reflects that.
Callable Bonds
A callable bond gives the issuer the right to repay the debt early, typically after a specified non-call protection period. Many municipal bonds, for example, become callable ten years after issuance. When interest rates drop significantly, issuers exercise the call to refinance at cheaper rates, the same logic behind refinancing a mortgage.
For you, a call is unwelcome. You get your principal back ahead of schedule, but now you have to reinvest it in a lower-rate environment. To compensate for this reinvestment risk, callable bonds pay higher coupons than otherwise identical non-callable bonds. Some issuers add a small call premium above face value.
A variation called a make-whole call provision requires the issuer to pay you the present value of all remaining coupon payments and principal, discounted at a rate tied to Treasury yields plus a small spread. Make-whole calls are more common in corporate debt and are expensive for the issuer to exercise, which makes them unlikely outside of acquisition scenarios. The practical effect is near-certain cash flow stability while technically preserving the issuer’s ability to retire the debt.
Puttable Bonds
A puttable bond flips the option to the investor’s side. You have the right to sell the bond back to the issuer at a predetermined price on specified dates before maturity. You would exercise a put if interest rates have risen (making your below-market coupon less attractive) or if the issuer’s credit quality has deteriorated. The put provides a floor on your losses and a guaranteed exit. Because the option benefits you, puttable bonds offer lower yields than comparable bonds without a put feature.
Convertible Bonds
Convertible bonds straddle debt and equity. They start as regular corporate bonds paying a fixed coupon, but they include an option to convert the bond into a set number of the issuer’s common shares at a predetermined conversion price. If the company’s stock rises above that price, you can swap the bond for shares and participate in the upside. If the stock goes nowhere, you keep collecting coupons and get your principal back at maturity.
That equity option isn’t free. Convertibles pay lower coupons than comparable non-convertible bonds from the same issuer, because the conversion feature has standalone value. They tend to appeal to investors who want bond-like downside protection with some exposure to stock appreciation.
Bonds Grouped by Security and Credit Quality
Security and credit quality answer a single question: how likely are you to get your money back if things go wrong? Security deals with what assets back the bond. Credit quality is an independent expert opinion on the issuer’s ability to pay.
Secured and Unsecured Bonds
A secured bond gives you a direct claim on specific assets if the issuer defaults. Mortgage bonds are backed by real property. Collateral trust bonds are backed by financial assets like stocks or other bonds held in trust. If the issuer enters bankruptcy, those pledged assets get liquidated to pay secured bondholders first.
Unsecured bonds, usually called debentures, have no specific collateral behind them. You’re relying entirely on the issuer’s general ability to generate cash. In a liquidation, debenture holders stand behind secured creditors in the repayment line. That weaker position means debentures need to offer higher yields to attract buyers.
Investment Grade and High Yield
Credit rating agencies like S&P Global Ratings, Moody’s, and Fitch assign letter grades to bond issuances based on the issuer’s financial strength and likelihood of default. The scale runs from AAA (the strongest) down to D (already in default), and the critical dividing line sits between BBB- (or Baa3 on Moody’s scale) and BB+ (Ba1).9S&P Global Ratings. Understanding Credit Ratings
Everything rated BBB-/Baa3 and above is investment grade. These issuers have stable cash flows, manageable debt, and strong competitive positions. Many institutional investors like pension funds and insurance companies are restricted by regulation or internal policy to holding only investment-grade debt, which creates built-in demand and keeps yields relatively modest.
Anything rated BB+/Ba1 or below falls into high-yield territory, often called junk bonds. These issuers have weaker finances, higher leverage, or uncertain business outlooks. The market compensates for that elevated default risk with substantially higher coupon rates. High-yield bonds can deliver equity-like returns in good years and carry real principal loss risk in downturns. The difference between a BB issuer that survives and a CCC issuer that defaults can be your entire investment.
Bonds Grouped by Tax Treatment
Two bonds with identical yields can produce very different after-tax returns depending on how their interest is taxed. Getting this wrong is one of the most common mistakes individual investors make, especially when comparing municipal and corporate debt.
Taxable Bonds
Most corporate bonds and all Treasury securities generate interest that is fully taxable at the federal level. Treasury interest, however, is exempt from state and local income taxes under federal law, which gives Treasuries a meaningful advantage over corporate bonds for investors in high-tax states.10Office of the Law Revision Counsel. 31 USC 3124 – Exemption From Taxation
Tax-Exempt Municipal Bonds
Interest on state and local government bonds is excluded from federal gross income under Internal Revenue Code Section 103, with limited exceptions for certain private activity bonds and arbitrage bonds.11Office of the Law Revision Counsel. 26 USC 103 – Interest on State and Local Bonds If you live in the same state that issued the bond, the interest is often exempt from state and local taxes as well, creating what’s sometimes called a triple tax exemption.
The trade-off is yield. Municipal bonds pay lower nominal coupons than taxable bonds of similar credit quality. To compare the two fairly, calculate the taxable equivalent yield (TEY) by dividing the municipal yield by one minus your marginal tax rate. A 3% municipal yield is equivalent to roughly 4.6% on a taxable bond for someone in the 35% federal bracket. Skipping this calculation leads investors in lower tax brackets to buy munis that leave them worse off than a taxable alternative.
Selling a Bond Before Maturity
Selling a bond in the secondary market triggers capital gains rules regardless of the bond type. If you sell for more than your adjusted cost basis, the profit is taxed as a short-term or long-term capital gain depending on your holding period. This applies even to municipal bonds, where the interest income is tax-free but the capital gain is not. If you buy bonds in the secondary market at a discount, the gain at maturity may be taxed as ordinary income rather than capital gains if the discount exceeds a small threshold.6Internal Revenue Service. Publication 550 (2025), Investment Income and Expenses
Bonds Grouped by Maturity and Duration
Maturity tells you when you get your money back. Duration tells you how much the bond’s price will swing while you wait. Confusing the two costs people real money in volatile rate environments.
Short, Intermediate, and Long-Term
Bonds are loosely grouped into short-term (roughly one to five years), intermediate-term (five to ten years), and long-term (beyond ten years). These ranges aren’t standardized, but the principle is consistent: the longer the maturity, the more exposed you are to interest rate changes. You’re locking in today’s coupon rate for a longer stretch, so any shift in market rates creates a bigger gap between what your bond pays and what new bonds offer. Long-term bonds compensate for the added volatility with higher yields. Short-term bonds give you more price stability and quicker access to your principal but pay less for the privilege.
Duration as the Real Measure of Rate Sensitivity
Maturity only tells part of the story. A 10-year zero-coupon bond and a 10-year bond paying a 6% coupon have the same maturity but behave very differently when rates move, because the high-coupon bond returns cash to you sooner through its semiannual payments. Duration captures this distinction by measuring the weighted average time until you receive all of a bond’s cash flows, factoring in both coupon payments and the final principal repayment.12FINRA. Brush Up on Bonds – Interest Rate Changes and Duration
As a rough rule, for every one-percentage-point change in interest rates, a bond’s price moves in the opposite direction by approximately its duration number. A bond with a duration of 7 years would lose about 7% of its value if rates jumped one full point.12FINRA. Brush Up on Bonds – Interest Rate Changes and Duration Higher coupons pull duration down because you’re getting more of your money back sooner. Longer maturities push duration up. Zero-coupon bonds have the highest duration of any bond at a given maturity because all cash flow arrives at the very end. When you’re evaluating how much rate risk you’re actually taking on, duration is the number to watch.