By: Michael E. Martinez

If you've read previous articles on Cash City about bonds, then you would know that they are a conservative, relatively safe investment. Knowing which types of bonds to invest in is also an important component of successful bond investing; there are many different types to choose from. There are too many to mention in one article, so mentioned here are the major types.

A secured bond is backed by collateral which can be sold by the bondholder to satisfy the claim that if the bond's issuer doesn't pay interest as well as principal when they are due. An unsecured bond or called debenture is backed by the full faith and credit of the issuer, but not by collateral. A convertible bond gives the owner privilege or exchange for other securities of the company that issued it at a later date and under certain conditions.

Municipal bonds are sold by cities, states, and other local governments. Interest is exempt from federal tax. It's also exempt from state or city taxes depending on the bond. In a high tax area such as New York City, triple tax free municipal bonds are attractive to high income investors. Callable bonds can be paid off before their due date. Insured bonds are municipal bonds that have their principal and interest payments guaranteed by an insurance company but is paid at a lower yield in exchange for higher security.

Remember that a bond is rated by the financial strength of each bond's issuer whether a corporation or government. The ratings range from AAA which means it's highly unlikely to default, all the way to D which means likely to default. Bonds rated from BB or lower, are not considered investment grade.