There are also provisions that allow either the issuer or the bondholder to alter a bond's maturity date. A callable bond entitles the issuer to pay off the principal prior to the stated maturity date. Similarly, the owner of a putable bond can force the issuer to pay off the principal before the maturity date. A convertible bond gives the bondholder the right to exchange the bond for shares of the issuer's common stock at a specific date.
Bond issuers can sell bonds directly through an auction process or use investment-banking services. The investment banker buys the bonds from the issuer and then sells them to the public. The U.S. Government issues bonds through the Department of Treasury. These bonds are known as Government Securities, and are backed by the unlimited taxing power of the federal government. Federal agencies and government-sponsored enterprises also issue bonds of their own. In general, all of these federal bonds are considered to be among the safest investments.
State and local governments issue municipal bonds through public entities such as colleges and universities; hospitals; power authorities; resource and recovery projects; toll roads; gas; water; and electric utilities. Municipal bonds are very attractive because their interest is exempt from federal income tax and some local taxes. There are two types of municipal bonds: general obligation bond and revenue bond. Like a government security, a general obligation bond is secure by the issuer taxing power. Revenue bonds are used to finance a particular project and the income generated by the project will provide funds to pay interest to the bondholders.
From an investor's perspective, stocks offer a higher potential rate of return if profit rates rise, but bonds are generally safer investments. Stock dividends are paid out of company profits, while bonds interest payments are made even if the company goes bankrupt.