Bond Types: Treasuries, Corporate, Municipal & More
The full spectrum of bond issuers — government, corporate, municipal, agency — and how credit risk, yield, and tax treatment differ.
In this lesson you'll learn
The risk/yield spectrum from Treasuries to junk bonds
All five types of Treasury securities (T-Bills, T-Notes, T-Bonds, TIPS, I-Bonds)
Investment-grade vs high-yield corporate bonds
How muni bonds work and the tax-equivalent yield formula
When munis make sense — and when they don't
The Bond Universe — Who Issues Bonds?
Bonds are issued by governments (from the US Treasury to municipal water districts) and corporations (from Apple to struggling startups). The issuer's creditworthiness determines the yield: safer issuers pay less; riskier issuers pay more.
US Treasury Securities
Issued by the US federal government. Backed by "full faith and credit" — considered the world's safest bonds. There is essentially zero credit risk; the government can always raise taxes or issue currency to pay. The main risks are interest rate risk (prices fall when rates rise) and inflation eroding purchasing power.
T-Bills (Treasury Bills)4 weeks – 1 year
No coupon — issued at a discount, redeemed at par. The difference is your return. Most liquid government security. Used as the "risk-free rate" in finance.
T-Notes (Treasury Notes)2–10 years
Semi-annual coupon payments. The 10-year T-Note yield is the benchmark everyone watches — it influences mortgage rates, corporate borrowing costs, and is the single most important interest rate in the world.
T-Bonds (Treasury Bonds)20–30 years
Semi-annual coupon. The longest maturity = most sensitive to interest rate changes. The 30-year bond fell ~30% in 2022 as the Fed raised rates dramatically.
TIPS (Inflation-Protected)5, 10, 30 years
Principal adjusts with the Consumer Price Index (CPI). Your coupon payments grow with inflation. Real yield is locked in regardless of inflation — the best protection against rising prices in the fixed income world.
I-Bonds (Savings Bonds)Up to 30 years
Inflation-linked rate resets every 6 months. Purchase limit: $10,000/year per person. Cannot be redeemed in the first year; 3-month interest penalty if redeemed before 5 years. Excellent for emergency funds or conservative savers.
Tax treatment: Treasury interest is federally taxable but exempt from state and local taxes. This makes Treasuries especially attractive to investors in high-tax states like California and New York.
Corporate Bonds
Issued by companies to raise capital for operations, acquisitions, or refinancing. The extra yield over comparable Treasuries is called the "credit spread" — compensation for the risk that the company might default.
Investment Grade (BBB and above)
Issued by Apple, Microsoft, Johnson & Johnson
Yield: 1–3% above comparable Treasuries
Low default risk — companies with stable cash flows
Most widely held by pension funds and institutions
→Banned from most pension funds and insurance cos.
→Can diversify into via ETFs like HYG or JNK
Unlike Treasuries or munis, corporate bond interest is fully taxable at both federal and state level. Keep this in mind when comparing yields — a 5% corporate yield is worth less after tax than a 4% Treasury yield for someone in a high-tax state.
Municipal Bonds ("Munis")
Issued by US states, cities, counties, school districts, hospitals, and other government entities. The defining feature: interest income is exempt from federal income tax, and often exempt from state tax if you live in the issuing state.
Because of the tax exemption, munis have lower nominal yields than comparable corporate bonds — but the after-tax return can be higher for investors in high tax brackets.
Tax-Equivalent Yield Formula
TEY = Muni Yield ÷ (1 − Your Tax Rate)
Example: 3.5% muni yield for someone in the 32% bracket: TEY = 3.5% ÷ (1 − 0.32) = 3.5% ÷ 0.68 = 5.15% This muni is equivalent to a 5.15% taxable bond — competitive with most investment-grade corporate bonds.
Tax Bracket
Muni 3.5% TEY
vs Corporate at 5%
12%
3.98%
Corporate wins (5% > 3.98%)
22%
4.49%
Corporate wins slightly
32%
5.15%
Muni wins (5.15% > 5%)
37%
5.56%
Muni wins significantly
⚠
Rule of thumb: munis only make sense in taxable accounts if you're in the 22% bracket or higher. In an IRA, the tax exemption is completely wasted — all IRA withdrawals are taxed as ordinary income regardless. Never hold munis in a tax-deferred account.
Quick Knowledge Check
3 questions · test what you've just learned
1
Which bond type is backed by the full faith and credit of the US federal government?
2
You are in the 35% federal tax bracket. A municipal bond yields 3.8%. What is its tax-equivalent yield?
3
Where does it NOT make sense to hold municipal bonds?
✓ Key takeaways from Lesson 2
US Treasuries have zero credit risk — backed by the federal government. State/local tax exempt.
Five Treasury types: T-Bills (discount, 1yr or less), T-Notes (2–10yr), T-Bonds (20–30yr), TIPS (inflation-linked principal), I-Bonds (inflation rate, $10k/yr limit).
Corporate bonds pay a 'credit spread' over Treasuries — higher spread = more default risk. Fully taxable.
Municipal bonds are federally tax-exempt. Calculate tax-equivalent yield to compare against taxable bonds.
Munis only make sense in taxable accounts for investors in the 22%+ bracket. Never in an IRA.