Most investors are aware of the different types of stocks: big-company, small-company, technology, international and so on. And it may be a good idea to own a mix of these stocks as part of your overall investment portfolio. But the importance of diversification applies to bonds, too — so, how should you go about achieving it?
To begin with, individual bonds fall into three main types: municipal, corporate and government. Within these categories, you’ll find differences in the bonds being issued. For example, government bonds include conventional, fixed-rate Treasury bonds as well as inflation-protected ones, along with bonds issued by government agencies, such as the Federal National Mortgage Association (or Fannie Mae).
Corporate bonds are differentiated from each other by several factors, but one important one is the interest rate they pay, which is largely determined by the credit quality of the issuer. (The higher the rating grade — AAA, AA and so on — the lower the interest rate; higher-rated bonds pose less risk to investors and therefore pay less interest.)
