Choosing The Right Bond For You If you are going to invest in bonds, it is important to come up with a strategy that fits in with your overall investment plan and risk tolerance.				> Home > Glossary > Support
		If you hold them until maturity, Treasury bills, notes and bonds are probably the safest bond investments because they are backed by the U.S. Treasury Department. What's more, you don't have to pay state tax on the income from these instruments. However, their value is subject to interest rate changes, so there is a certain amount of risk involved if you end up selling them on the open market instead of holding them to maturity. U.S. Savings Bonds are a familiar option to many investors. They can be bought at banks and brokerages, and online through the Treasury department at http://www.publicdebt.treas.gov. A Treasury bond's maturity often determines what it is called. In general, if it matures in one year or less, it's a "bill"; between one and 10 years, a "note"; in more than 10 years, it's a "bond."
		Government agency bonds are probably as safe as Treasuries, and offer the same tax advantage along with slightly higher yields. However these can often only be bought through brokers, which means you'll lose some of that interest rate advantage to brokers' fees. Some well-known mortgage-backed securities fall into this category -- "Ginnie Mae" (Government National Mortgage Association), "Fannie Mae" (Federal National Mortgage Association) and "Freddie Mac" (Federal Home Mortgage Corporation).
		Mortgage-backed securities are extremely sensitive to interest rate changes because an interest-rate change has a double-whammy effect. For example, when interest rates go up, existing bonds lose value because buyers prefer new bonds at the higher rate. Additionally, higher interest rates generally mean a decrease in demand for mortgages. The effect is the opposite if interest rates decline. So if you buy mortgage-backed securities, expect them to be more volatile than traditional government-issued bonds.
		Municipal bonds (issued by state or local government) generally enable you to earn interest that is free of federal and state tax if you live in the state that issued the bond. "Munis" are particularly beneficial to investors in a high tax bracket. But keep in mind that they usually offer a lower interest rate than other bonds because of their attractive tax advantage.
		Also, before you buy munis you should be sure to ascertain that they will definitely not be taxed. If the bond issuer does not comply with IRS tax laws, the IRS could hold the bondholders liable for any taxes owed by the bond issuer. This has been known to happen. Be sure to check out the issuer of the muni bond thoroughly to ensure that it is acting in good faith.
		Corporate bonds, issued by private-sector companies, often offer higher interest income than government bonds. However, that income is taxable at the federal, state and local levels, unlike Treasurys and municipal bonds. What's more, you'll have brokers' fees to contend with. Also, many of the best corporate bonds are callable (the issuer can buy them back before maturity), making it difficult to plan a long-term investment strategy with certainty. Some corporate bonds are convertible bonds, meaning that they come with an option to convert them into the company's stock.
		Tax-deferred savings note: Since the interest you earn on your tax-deferred retirement account is already tax-advantaged, it does not make sense to invest it in munis, since they generally pay a lower interest rate than other bonds. Corporate bonds pay interest that is taxable, and would therefore be a better choice for a tax-deferred account, probably in the form of a bond mutual fund.

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