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ers, for example, are paid for through general obligation Corporate and municipal bonds may be callable. U.S.
bonds. A revenue bond is one that is issued by an enter- Treasuries are not.
prise for a public purpose that is expected to generate rev-
enues, such as the building of airports, utility company Tax Effects of Bond Holdings. While interest on corpo-
infrastructure, toll roads, universities, and hospitals. The rate bonds is fully taxable to the bondholder, interest on
money to pay bond interest and principal at maturity will Treasuries is exempt from state (but not federal) income
be paid by successful enterprises’ revenue-generating activ- tax. Interest on municipal bonds is exempt from federal
ities. income tax. If the municipal bond is issued by the juris-
Municipal bonds are ranked by financial information diction in which the bondholder resides, the interest is
rating services. For example, the same ranking used by tax-exempt from both the federal government and the
S&P for corporate bonds is used for municipal bonds. state government. If there is a local income tax, the inter-
est is tax-exempt at this level, too. Thus in some instances
the bondholder has a triple exemption. Because of the tax-
BONDS AS AN INVESTMENT
exempt nature of municipal bonds, their rates are usually
Bonds are purchased by Americans for investment. Bonds one- to two-percentage points lower than that of a com-
are considered to be a less-risky type of investment. Bonds parable taxable corporate bond, for which there is no tax
of the U.S. government are perceived to be the safest of all exemption.
investments. Among the considerations for an investment
are the following:
SOME GENERAL CONSIDERATIONS.
Bonds typically earn a return greater than that offered by
Risk Involved. There are several risks associated with
a bank on its savings account or certificates of deposit.
bonds, even though there is a general belief that they are Bonds provide certainty about the interest payments that
safer than, for example, investments in stocks and real will be received. Prices of bonds are much less volatile
estate. Among the risks are these: when compared to prices of stocks. Defaults on bonds are
Market risk: the risk an investor faces should interest not common. It is also possible to buy bond funds, simi-
rates rise after the bonds have been purchased. As market lar to those provided for stocks.
interest rates rise, the price of bonds falls (and vice versa). Much information is available at Web sites. Using
All bonds—corporate, Treasury, and municipal—are sub- such keywords terms as asset-backed bonds, bond fund, for-
ject to market risk. eign government bonds, or zero bonds at a comprehensive
Credit risk: the risk associated with investments in search engine will provide descriptions and characteristics
corporate and municipal bonds (but not Treasuries). This of each.
risk relates to the actual creditworthiness of the issuer of
SEE ALSO Capital Markets; Finance; Investments
the bonds. Since a bond is a loan, a bondholder has to
assess the likelihood that the issuer will be able to pay the
BIBLIOGRAPHY
periodic interest payments and the bond’s par value at
Bond Market Association (2001). The fundamentals of municipal
maturity. bonds (5th ed.). New York: Wiley.
With Treasury bonds, there is virtually no credit risk Brigham, E. F., and Horeston, J. F. (2004). Fundamentals of
since most investors see them as having the full faith of the financial management (10th ed.). Cincinnati: Thomson
U.S. government behind them. Because of this perceived South-Western.
absence of default, investors typically use the rate offered Fabozzi, F. J. (2003). Bond markets: Analyses and strategies (5th
on Treasuries as the benchmark against which other ed.). New York: Prentice Hall.
investments are evaluated. Thau, A. (2001). The bond book: Everything investors need to
know.… New York: McGraw-Hill.
Call risk: the risk that issuers may call back, or retire,
the bonds. Such bonds may be retired when interest rates
are declining. The bondholder is paid par value (and usu- Mary Ellen Oliverio
ally a small “call premium” as well) and any accrued inter- Allie F. Miller
est since the last interest payment date. At such a time, the
investor may want to replace the earlier bonds, but finds
that the interest earned will be less than was the case ear-
lier. Furthermore, if the investor had originally purchased BRANDING
the bonds at a premium, it is likely that the original pur- SEE Advertising Agencies; Mass Marketing; Product
chase price would not be realized when the bond is called. Labeling; Product Lines

ENCYCLOPEDIA OF BUSINESS AND FINANCE, SECOND EDITION 57