Bonds

Types of Bonds in Different Classifications

  • Bond refers to an ordinary bond.

  • The types of bonds according to a pledge. Unsecured bonds are called debentures. Companies issuing secured bonds have specific assets that constitute a guarantee for payment of the bonds.

  • Every bond has a face value or par value, i.e., the amount to be paid to the bondholder on the maturity date. The common face values for bond issues in the US are as follows:

  1. Corporate bonds: $1,000.

  2. Municipal bonds: $5,000.

  3. Government bonds: $10,000.

  • The nominal interest rate paid to the bondholder is called the coupon rate or the interest rate. It is calculated as a percentage of the face value. In most cases, the interest is paid in two semi-annual payments, each totaling half of the annual interest. An investor holding a bond with a face value of $1,000 and an interest rate of 8% will receive two interest payments of $40 every year.

  • The interest rate on a bond can either be a fixed rate or a floating rate. A fixed rate does not change during the life of the bond. In most cases, a floating rate is determined in proportion to some base interest rate, and is updated according to changes in the base interest rate.

  • Every bond has a maturity date, i.e., the date on which the face value (principal) is returned to the investor. This payment is called the principal payment.

  • Classification of types of bonds can also be according to redemption. A bond subject to early redemption is a callable bond. These bonds include a clause allowing the issuer to redeem the bond before the original maturity date. An early call clause is a call provision. In most cases, it includes a number of dates when the issuer can call in the bond, i.e., redeem it before the original maturity date. Sometimes a date is established after which the early redemption option can be exercised. For example, in terms of a bond with an original maturity period of 15 years, it can be stipulated that beginning five years subsequent to the issue date, the issuer has the option to call in the bond.

  • The return on a bond is called the yield. This term is general since there are several types of bonds yield. The most common is yield to maturity, which means the average annual yield that the investor receives if the bond is held until maturity.

  • Zero coupon bonds do not pay interest during the investment period. The bonds are sold to investors at a price that is lower than their face value, while the investors receive the full face value on the maturity date. The investors’ profits result from the difference between the issue price and the face value returned to them at maturity. Zero coupon bonds are particularly responsive to changes in the interest rate since the entire monetary return occurs at the end of the life of the bonds i.e., there aren’t any interest payments prior to the maturity date.

  • Insolvency on the part of the bond issuer is also known as default.

Types of Bonds in Different Classifications573Types of Bonds in Different Classifications