Perhaps the most recognized type of fixed income is a “Treasury Bond.” These are bonds issued by the United States Government and they are generally viewed by the market to be “risk-free” as the risk that the U.S. Government will not repay the debt or skip interest payments is negligible. Other countries across the globe also rely on borrowing money but not all countries are risk-free. Risks can be low for countries like Switzerland or higher for countries like Brazil or Turkey. The debt of other global governments is sometimes referred to as “Sovereign Bonds.”
In addition to the federal government borrowing money, state and local governments also borrow money for various reasons. These bonds are referred to as “Municipal Bonds” and can range from very high-quality bonds with limited risk like those issued from a growing state like Texas, or they can be higher risk if they are from a small town in rural America that may be reliant on the coal industry. The benefit of municipal bonds is that the interest payments are generally exempt from Federal income taxes and in the case of bonds of your home state, exempt from state income tax as well
Companies also borrow money to grow their businesses and these types of bonds are called “Corporate Bonds.” Although corporate bonds are generally considered “riskier” from a repayment perspective than bonds issued by the U.S. Government, the risk level can range from relatively low for a large, multi-national technology company like Apple to very high for a small oil driller focused in South Dakota. Companies with strong prospects of repaying their debt and maintaining interest payments are considered “Investment Grade Corporate Bonds,” while those with considerably less certainty are considered “High Yield Corporate Bonds” (with the riskiest bonds also known as “Junk Bonds”).