There are many ways to invest in bonds, differentiated both by the amount of risk and return the buyer is willing to accept. Here are the main categories of bonds you will need to know.

Treasuries: Issued by the U.S. government and are considered the safest bonds on the market. As such, you won’t collect as much in interest as you might elsewhere, but you don’t have to worry about defaults. They’re also used as a benchmark to price all other bonds, such as those issued by companies and municipalities. 

Treasuries are available in $1,000 increments and are initially sold via auction, where the price of the bond and how much interest it pays out is determined. You can bid directly with no fees through TreasuryDirect or through your bank or broker. They also trade on the open market.

Treasury Bills , or T-bills, are a short-term investment sold in terms ranging from a few days to 26 weeks. They’re sold at a discount to their face value ($1,000), but, when T-bills mature, you redeem the full face value. You pocket the difference between the amount you paid and the face value, which is the interest you earned.

Treasury Notes are issued in terms of two, five and 10 years and in increments of $1,000. Mortgage rates are priced off of the 10-year note (more commonly called the 10-year bond even though it’s technically a note. We explain bonds just below)

Treasury Bonds are issued in terms of 30 years. They pay interest every six months until they mature.

Treasury Inflation-Protected Securities (TIPS) – TIPS are used to protect your portfolio against inflation. TIPS usually pay a lower interest rate than other Treasury securities, but their principal and interest payments, paid every six months, adjust with inflation as measured by the Consumer Price Index.  It’s best to hold these in a tax-deferred account, like an individual retirement account, or IRA, because you’ll have to pay federal taxes on the increase in the underlying principal – even though you don’t get the principal back until maturity. When TIPS do mature, investors receive either the adjusted principal or the original principal, whichever is greater. TIPS are sold with five, 10, and 20-year terms.

Savings Bonds: We’ve all received at least one of these as a gift somewhere along the way, usually from a great-aunt for your high-school graduation, birthday or some other milestone. While a truly mundane gift, it can’t hurt to understand how they work. Who knows, it may be time to dust one of yours off and cash it in. You can redeem your savings bonds after a year of holding them, up to 30 years. They’re currently offered in two flavors, both issued by the U.S. Treasury:

EE Savings Bonds – These bonds earn a fixed-rate of interest and can be redeemed after a year (though you lose 3 months interest if you hold them less than five years), but can be held for up to 30 years. When you redeem the bond, you’ll collect the interest accrued plus the amount you paid for the bond. They can be purchased in the form of a paper certificate at a bank for half of their face value (for example, a $100 bond can be purchased for $50) in varying increments from $50 to $10,000. If they’re purchased online, they’re purchased at face value, but can be bought for any amount starting at $25.

I Savings Bonds – These are similar to EE savings bonds, except that they’re indexed for inflation every six months. These are always sold at face value, regardless of whether you buy paper bond certificates or you buy them electronically.

Agency Bonds: Agency debt is not quite as safe as Treasuries, but yet it’s often safer than the most pristine corporate bonds. They’re issued by government-sponsored enterprises, the most well-known being Fannie Mae (formerly known as the Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corp.). Fannie and Freddie buy mortgages from lenders, package them into securities and then sell them to investors. Because these companies are chartered and regulated in part by the government, the bonds they issue are perceived to be safer than corporate bonds. They are not, however, backed by the “full faith and credit” of the U.S. government like Treasuries, which would make them virtually risk-free. (Fannie and Freddie are currently controlled by the federal government under a conservatorship, giving explicit government backing to the bonds.)

Municipal Bonds (Munis): Munis, as they’re commonly known, are issued by states, cities and local governments to fund various projects. Municipals aren’t subject to federal taxes, and if you live where the bonds are issued, they may also be exempt from state taxes. Some municipal bonds are more credit-worthy than others, though some munis are insured. If the issuer defaults, the insurance company will have to cover the tab.

Corporate Bonds: Company-issued debt is just that – bonds issued by companies. Corporate debt can range from extremely safe to super risky.                                                   

International Bonds: Largely in the form of foreign government bonds and private corporate bonds issued by international companies, international bonds are a little more difficult to purchase individually. Some domestic mutual funds feature international bonds and some funds that trade on the stock exchange include international fixed-income securities. Buying international bonds is generally done using funds as it is much more difficult to purchase individual international bonds that it is to purchase domestic bonds. This is due to a number of factors, including greater commissions, fluctuating exchange rates and the fundamental difficulty in purchasing bonds from foreign governments.