You can think of a simple bond as an IOU, where you as the bondholder are lending the issuer money and they intend to pay you interest and will pay you back in full at a predetermined time. The interest comes in the form of coupon payments, which are made at a prespecified frequency (usually semi-annual). The time at which you receive your principal is called the maturity date of the bond. For example, lets say you bought a bond from me that paid 5% coupons, semiannually, with a maturity date of 2 years. If you paid $1,000 for this bond, the cashflows would look like the following: $25, $25, $25, $1,025. Every 6 months you would receive $25 as the coupon, and on the final maturity date, you would receive the $25 coupon + the face value of the bond of $1,000. Of course, your receipt of these cashflows is dependent on my ability to pay you at each point in time. Thus, the cashflows are characterized as being "risky" and if I failed to pay coupon or principal, it would be considered an event of default. As a result, you as an investor will want to receive a larger coupon if you deem me to be more risky, and vice versa.

Bonds can best be characterized by the types of entities that issue them. Most bonds can be characterized as either a U.S. Government Security, GSE Debt Security, Corporate Bond or a Municipal Bond.

U.S. Government Securities

U.S. Government Securities are commonly referred to as "Treasuries" because they are issued by the U.S. Treasury Department. They are backed by the "full faith and credit" of the U.S. Government and are as close to a "risk-free" investment one can find in practice. The U.S Treasury issues the following types of securities: