Bonds are issued by five main groups: the U.S. Treasury, state and local governments, corporations, government-sponsored enterprises and federal agencies, and supranational organizations and foreign governments. Understanding who issues bonds matters because the issuer shapes almost everything else about the investment: how safe it is, how the interest is taxed, and what legal protections you have if things go wrong.
The U.S. Treasury
The U.S. Department of the Treasury is the single largest bond issuer in the world. It borrows on behalf of the federal government to cover the gap between tax revenue and spending, within a statutory ceiling on total outstanding federal debt set by Congress under 31 U.S.C. § 3101.1Office of the Law Revision Counsel. 31 USC 3101 – Public Debt Limit The Treasury raises that money by selling securities through regular public auctions.2U.S. Department of the Treasury. Financing the Government
Marketable Treasury securities come in three forms, sorted by how long your money is committed:
- Treasury bills mature in 4 to 52 weeks. They’re sold at a discount and pay no periodic interest; you receive the full face value at maturity.
- Treasury notes mature in 2, 3, 5, 7, or 10 years and pay interest every six months.
- Treasury bonds run 20 or 30 years and also pay interest every six months.
The Treasury also issues Treasury Inflation-Protected Securities (TIPS), whose principal adjusts with the Consumer Price Index.3TreasuryDirect. About Treasury Marketable Securities
Separately, the Treasury sells savings bonds directly to individuals through TreasuryDirect.gov. Series EE bonds earn a fixed rate; Series I bonds earn a rate that adjusts with inflation. Unlike marketable Treasuries, savings bonds cannot be sold to other investors. You redeem them with the government.
State and Local Governments
States, counties, cities, school districts, water authorities, and similar bodies issue bonds — collectively called municipal bonds — to pay for roads, schools, hospitals, water systems, and other public infrastructure. Their borrowing authority comes from state constitutions and statutes, which typically cap debt as a percentage of the assessed value of taxable property in the jurisdiction. Many issuances require voter approval.
Municipal bonds split into two categories:
- General obligation bonds are backed by the issuer’s full taxing power. If revenue falls short, the government can raise taxes to cover the payments.
- Revenue bonds are repaid only from a specific project’s income, such as highway tolls, water fees, or airport charges. If the project underperforms, bondholders bear the loss; general tax revenue is not pledged.
Interest on municipal bonds is generally excluded from federal gross income under 26 U.S.C. § 103, and most states also exempt interest on bonds issued within their own borders.4Office of the Law Revision Counsel. 26 USC 103 – Interest on State and Local Bonds When a bond escapes federal, state, and local income tax, investors call it triple tax-exempt. That advantage lets municipal issuers borrow at lower rates than corporations. Not every muni qualifies, though. Private activity bonds, where the proceeds benefit a private entity, are typically taxable unless they meet specific Internal Revenue Code provisions, and arbitrage bonds also lose their tax-exempt status.
Corporations
Corporations issue bonds to raise capital without diluting ownership through new stock. Both public and large private companies use bond markets to fund expansions, acquisitions, and operations. Corporate bonds generally pay more than government bonds because they carry more risk: a company can run into trouble and miss payments.
Federal securities law forces disclosure before a public sale. Under 15 U.S.C. § 77e, a corporation cannot sell securities to the public without an effective registration statement, and it must give investors a prospectus describing its financial condition, the offering terms, and the risks.5Office of the Law Revision Counsel. 15 USC 77e – Prohibitions Relating to Interstate Commerce and the Mails Registration under 15 U.S.C. § 77f requires signatures from the issuer’s principal officers and a majority of the board, along with a filing fee to the SEC.6Office of the Law Revision Counsel. 15 USC 77f – Registration of Securities
The Indenture Trustee
Public corporate bond offerings must also include a formal agreement, called a trust indenture, between the issuer and an independent trustee representing bondholders. This requirement comes from the Trust Indenture Act of 1939. The trustee monitors compliance with the bond’s terms and, if the issuer defaults, must exercise its powers with the same care a reasonable person would use managing their own affairs.7Office of the Law Revision Counsel. 15 USC 77ooo – Duties and Responsibility of the Trustee Smaller offerings, generally those under $10 million in aggregate principal, are exempt.8Office of the Law Revision Counsel. 15 USC 77ddd – Exempted Securities and Transactions
Where Your Bond Sits in Line
Not all corporate bonds carry the same risk from the same company. If the issuer goes bankrupt, creditors are paid in a fixed order under 11 U.S.C. § 507.9Office of the Law Revision Counsel. 11 USC 507 – Priorities Secured bondholders, whose bonds are backed by specific assets like property or equipment, are paid first from that collateral. Unsecured senior bondholders come next, then subordinated (junior) bondholders. Common stockholders sit at the back and often receive nothing.
That hierarchy sets the price. Secured bonds pay less interest than unsecured ones; senior bonds pay less than subordinated ones. A debenture, an unsecured bond backed only by the company’s general creditworthiness, carries more risk than a secured bond from the same issuer and pays accordingly.
Government-Sponsored Enterprises and Federal Agencies
Government-Sponsored Enterprises (GSEs) are privately owned corporations chartered by Congress for specific public purposes, chiefly housing finance. The Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) are the leading examples. They buy mortgages from lenders and either hold them or package them into mortgage-backed securities, keeping money flowing into the housing market.
Fannie Mae’s authority to issue debt and mortgage-backed securities comes from 12 U.S.C. § 1719, which allows it to issue bonds with the Treasury Secretary’s approval.10Office of the Law Revision Counsel. 12 USC 1719 – Secondary Market Operations The statute requires every GSE bond to state on its face that it is not guaranteed by the United States and does not represent a federal debt obligation. In practice, the federal government placed both Fannie Mae and Freddie Mac into conservatorship in 2008, and investors widely treat their bonds as carrying implicit government backing. The Federal Housing Finance Agency oversees both entities.11Office of the Law Revision Counsel. 12 USC Chapter 46, Subchapter I, Part A – Financial Safety and Soundness Regulator
Federal agencies also issue debt directly, and this debt often carries an explicit government guarantee rather than an implicit one. The Small Business Administration, for example, issues trust certificates backed by pools of guaranteed small business loans that carry the full faith and credit of the United States.12Office of the Law Revision Counsel. 15 USC 697b – Pooling of Debentures That explicit backing generally means agency bonds pay less interest than GSE bonds.
Supranational Organizations and Foreign Governments
Supranational organizations, formed by multiple countries through international treaties, issue bonds to fund global development. The International Bank for Reconstruction and Development, better known as the World Bank, has been issuing bonds since 1947.13World Bank Treasury. Issues – World Bank Treasury Its bonds are not the direct obligation of any single country but are collectively backed by capital commitments from its 189 sovereign member countries.14World Bank Treasury. Debt Products FAQs
Foreign national governments issue sovereign bonds in global markets to finance their budgets. Enforcement can be complicated. The Foreign Sovereign Immunities Act generally shields foreign governments from U.S. court jurisdiction, but carves out an exception for commercial activities, which can include bond issuances.15Office of the Law Revision Counsel. 28 USC 1602 – Findings and Declaration of Purpose Foreign sovereign bonds also carry currency risk: if the bond pays in a currency that weakens against the dollar, your returns shrink even when every payment arrives on time.
How the Issuer Changes Your Tax Bill
Tax treatment tracks the issuer almost exactly. Interest on U.S. Treasury securities is subject to federal income tax but exempt from all state and local income taxes.16Internal Revenue Service. Topic No. 403, Interest Received Interest on most municipal bonds is federally tax-exempt under 26 U.S.C. § 103, and typically state tax-exempt if you live in the issuing state.4Office of the Law Revision Counsel. 26 USC 103 – Interest on State and Local Bonds
Corporate bond interest is fully taxable at both federal and state levels. You report all taxable interest on your federal return even if you don’t receive a Form 1099-INT.16Internal Revenue Service. Topic No. 403, Interest Received If a corporate bond was originally issued at a discount, you may also need to include a portion of that discount each year as original issue discount (OID) interest. Because of these differences, comparing yields across issuer types means comparing after-tax returns, not stated rates.
How the Issuer Changes Default Risk
The odds of missed payments vary sharply by issuer. U.S. Treasury bonds are considered virtually risk-free because they’re backed by the federal taxing power. Municipal bonds default historically at roughly 0.08% over a five-year horizon, while global corporate bonds default at roughly 7% over the same period. The gap widens at lower ratings: speculative-grade municipal bonds default at about one-fifth the rate of speculative-grade corporate bonds.
Credit rating agencies grade bonds to help investors assess this risk. Ratings from Aaa/AAA down through Baa/BBB are “investment grade,” meaning relatively low default risk. Anything below, Ba/BB and down, is “speculative grade” or “high yield.” The rating directly affects the interest rate the issuer must offer: lower ratings mean higher yields to attract investors.
Ratings aren’t guarantees. A bond’s grade can change if the issuer’s financial condition shifts, and if you buy individual bonds rather than a diversified fund, the issuer’s credit quality is something you have to watch on your own. Higher yields carry a real possibility of missed payments or lost principal.