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Bonds issued by private corporations vary in risk from typically super-steady
utility bonds to highly volatile, high-interest junk bonds. Also, many
corporate bonds are callable, meaning that they can be called in by the issuing
company and redeemed on a fixed date. The company pays back your principal
along with accrued interest, plus an additional amount for calling the bond
before maturity.
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The securities backed by the full faith and credit of the U.S. government carry
minimal risk. United States Treasury bills (T-bills) are issued for periods
from 4 to 26 weeks. They are sold at a discount and are redeemed for their full
face value at maturity. Other Treasury securities include Treasury notes, which
mature between 1 and 10 years, and the benchmark U.S. Treasury bond, issued for
periods of up to 10 years. Although the interest earned on these securities is
subject to federal taxation, it is not subject to state or local taxes.
Various federal agencies also issue bonds. As with any investment, these bonds
carry some risk. However, because the U.S. government guarantees timely payment
of principal and interest on them, they are considered very safe. *Some of
these bonds use mortgages as collateral. Most mortgage-backed securities pay
monthly interest to bondholders.
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Municipal bonds (munis) are issued by states, counties, or municipalities, and
are free from federal taxation. Some may be completely tax-free if you are a
resident of the state, county, or municipality of issuance. Though municipal
bonds generally offer lower interest payments compared with taxable bonds,
their overall return may be higher because of their tax-reduced (or tax-free)
status. Interest income may be subject to the alternative minimum tax.
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