A bond is a contract that requires the borrower to pay the interest income to the lender. It resembles the promissory note issued by the government and corporate.
The par value of the bond indicates the face value of the bond-like, the value stated on the bond paper.
Major Types of Bonds Available for Investment
Following are the types of bonds:
1. Premium Bonds
Premium bonds are those bonds that are sold at the price above the par value of the same. Suppose, a bond has a par value of $25.
Now, if an investor sells this bond in the market at a rate above the $25, say $50, and then this bond would be regarded as the premium bond.
In such a case the bond would be said to have been sold at a premium of $25.
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2. Convertible Bonds
Convertible bonds are the which entitle its holders to convert their bonds to the share equities during a particular time span.
This conversion from the bond to the equity shares can be by the holder on some predetermined fixed ratio. When these convertible bonds remain as a bond then they give their holders with an income which is fixed.
But if these bonds are converted into the shares then the features of the bond changes to those of the equity ones.
These convertible bonds are different from the ordinary bonds because they can be converted by the holder of the same from the bond character to the equity share of the same company.
This conversion is done on a specified ratio known as the conversion ratio.
3. Discount Bonds
Discount bonds are those bonds that have been sold by a customer at a price below the face value of the same.
Suppose, a bond has a par value of $100. Now, if an investor sells this bond in the market at a rate below $100, say $50, then this bond would be regarded as the discount bond.
In such a case the bond would be said to have been sold at a discount of $50. There are many bonds that are issued with an associated coupon rate which is below the ongoing rate of interest in the market.
In such a situation, the issuer has to offer the bond at such a price which is below the current bond price.
These types of bonds are also known as discount bonds. One of the examples of such discount bonds is the Zero-Coupon Bonds where the issuing company offers no coupon rate to the investor.
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4. Mortgage Bonds
Mortgage bonds are secured bonds and the underlying for the same could real estate or fixed assets such as machinery.
As these are secured by the mortgage of the underlying, the risk associated with such investments is considered below.
5. High Yield Bonds
High yield bonds are the bonds for which the rate of interest offered is higher. These bonds are also called as Junk Bonds.
The risk of credit associated with this type of bond is generally higher and is rated by the grading agencies as speculative in nature.
They also consider this asset type to be below the level of investment berceuse it is not evident that in the long run or for a specified time period this locked money would appreciate.
6. Fixed Income Bonds
Fixed income bonds are the types of bonds that generate a fixed income for its investors and are dispersed to the investors at a regular period of interval.
These interest payments associated with such a bond is generally low because the risk associated wit is almost nil.
The most popular fixed-income bonds in the bond market are the ones that are issued by governments such as the government’s bonds.
Another form of the fixed income bonds is the GIBs (Guaranteed Income Bonds).
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7. Government Bonds
Government bonds are those debt instruments that are issued by the domestic governments for its residents only.
Generally, the phenomenon of a government going bankrupt is not observed naturally.
Hence, the risk associated with government bonds is the least. This almost nil default risk makes this bond a highly secured one.
Thus, the compensation for holding such a bond is also very low in comparison to the other debt instruments.
The government issuing this bond offers the prospective investors a fixed yield for holding this bond.
8. Corporate Bonds
Companies, like the governments, borrow money by issuing bonds called corporate bonds (also called corporate debentures).
Internationally, a secured corporate debt instrument is called a corporate bond whereas an unsecured corporate debt instrument is called a corporate debenture.
Corporate debt instruments have traditionally been referred to as debentures, although typically they are secured.
For the sake of simplicity, we will refer to all corporate debt instruments like corporate bonds.
9. Foreign Bonds
A bond that is issued in a domestic market by a foreign entity, in the domestic market’s currency.
A foreign bond is most often issued by a foreign firm to raise capital in a domestic market that would be most interested in purchasing the firm’s debt.
For foreign firms doing a large amount of business in the domestic market, issuing foreign bonds is a common practice.
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10. Municipal Bonds
Municipal bonds are the bonds issued by states, cities, or other corporations.
These may be issued for a specific purpose and necessary funds may be raised.
11. Euro Bonds
Eurobonds are international bonds denominated outside the country in which the bond’s currency is denominated. It does not have to be issued in EUR.
For example, if a Germany company wants to modernize its manufacturing facilities in the United States, it may choose to borrow in USD in order to avoid currency exposure.
That is therefore a Eurobond, in spite of the fact that the currency is USD. As another example, an American company investing in Great Britain may choose to borrow in GBP. That is also a Eurobond.
A German company investing in EUR to expand its facilities in France is not issuing a Eurobond, because Germany’s national currency is EUR.
12. US Bonds
United States savings bonds are debt securities issued by the United States Department of the Treasury to help pay for the U.S. government’s borrowing needs.
U.S. savings bonds are considered one of the safest investments because they are backed by the full faith and credit of the United States government.
The savings bonds are nonmarketable Treasury securities issued to the public, which means they cannot be traded on secondary markets or otherwise transferable. They are redeemable only by the original purchaser, or a beneficiary in case of death.
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