• You can invest in debt financial instruments.hundred dollar bills image by MAXFX from Fotolia.com
  
  Just as you might borrow money to purchase a house, corporations, municipalities and the federal government all borrow money to finance their expenditures. They issue their debt in the form of bonds, notes or securitized products for investors to buy. Rating agencies evaluate the debt issued by companies and government entities, and those with low ratings must pay more interest, rather like consumers with low credit scores. Unlike the way you pay down a personal loan, however, most debt instruments make semi-annual interest-only payments until the due date of the loan.
  
  

Treasuries

• The federal government issues the largest amount of debt instruments, known to the investing public as Treasury bills, notes and bonds. Treasury debt receives the highest credit rating, because the federal government, through its power to tax, has zero risk of defaulting on its loans. Treasuries also pay some of the lowest interest rates because of their safety. Investors must pay federal taxes on the interest income, but the interest is exempt from state and local income taxes.
  
  

Municipal Bonds

• States and municipalities also issue debt to finance their expenditures and operations. Credit agencies exercise caution when assigning credit ratings to municipal debt, because cities can, and do, default on their loans. A municipality with a low credit rating must pay higher interest rates to make up for their higher default risk. However, because many types of municipal bonds pay interest that is exempt from federal, state and local taxes for investors who live in the same state, investors will accept lower interest rates, even from lower-rated municipal debt.
  
  

Corporate Bonds

• Corporations issue debt to finance their capital expenditures and operations. The same rating agencies that rate government debt also rate corporate debt, and corporations with the lowest ratings and the highest default risk must pay particularly high interest rates on their bonds. Below a certain rating, analysts refer to such bonds as "junk." Even aside from junk bonds, corporations typically pay the highest interest rates on their debt.
  
  

Certificates of Deposit

• Banks issue debt financial instruments in the form of Certificates of Deposit (CDs). Banks then use the funds raised from CD investments to finance bank loans to customers. Because the Federal Deposit Insurance Corporation (FDIC) insures CDs up to $250,000, bank CDs do not receive a rating, and experts consider them to be as safe as cash. This allows banks to set low interest rates on their CDs and still attract investors.
  
  

Securitized Products

• Securitized products pool asset-backed debts like home mortgages.investing money image by dinostock from Fotolia.com
  
  Investment firms pool debt instruments, such as home mortgages, and turn them into securities that can be bought and sold by other investors. Banks that sell their mortgages to these types of investment firms have more money they can loan out for new mortgages, and investors can buy a security that is backed by a physical asset (in this case, the house). Other types of asset-backed debt instruments have also been secured, including student and auto loans. Securitized debts pay the investor both interest and principal over time, making their structure somewhat different from conventional bonds.