What Is an Investment Bond?

by Madison Garcia

Stocks aren't the only investment option available to investors. Instead of acquiring equity, investors can make money by purchasing an investment bond from the company instead. Investment bonds are offered by a range of agencies and can have different maturity dates, risk levels and payment structures.

How Bonds Work

An investment bond is essentially a loan that you make to a business or a government agency. While the agency holds your loan, it may make you interest payments -- also known as coupon payments -- as a form of compensation. When the bond expires, or matures, you'll receive the specified amount as reimbursement. For example, you may pay $1,000 for a bond, receive annual coupon payments at the interest rate of 3 percent, and get $1,000 when the bond matures in five years.

Types of Bonds

Since it's unlikely that the U.S. government will default on its obligations, its offerings are among the safest types of bonds investors can purchase. Treasury bills are short-term government bonds that expire in 13 weeks, 26 weeks or one year. If you want longer maturities, you can opt for a treasury note that has a maturity of 2 to 10 years, or a treasury bond with a 10 year maturity. Municipal bonds are issued by state and local governments for public work projects and can have terms of up to 40 years. The yields on government bonds tend to be lower than corporate bonds or stocks, but the interest from some government bonds is tax exempt, making them a competitive investment for risk-adverse investors.

Investors also can purchase bonds from corporations. Yields on corporate bonds tend to be higher than yields on government bonds, because there's a higher chance that a corporation could default on its debt. Healthier, more established corporations are safer investments, so they have lower yield rates. Safe corporate bonds are referred to as investment-grade bonds and bonds from less stable companies are referred to as junk bonds or high-yield bonds.

Bonds at Par, Discount and Premium

The amount that you're reimbursed when the bond matures -- known as the face value of the bond -- isn't always the same as the issue price. If a bond offers the current market rate of interest, the bond's face value typically is the same as its issue price,in which case the bond is selling at par. Sometimes a company or agency will offer an interest rate that exceeds the current market rates. Because interest payments are higher, an investor will pay more to obtain the bond and bond will sell at a premium. For example, an investor may pay $1,050 for a $1,000 bond in order to obtain an interest rate that's two percent above the norm. Conversely, a company may offer a lower interest rate -- or no interest payment at all -- and the bond will sell below its face value at a discount.

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