Types of Bonds

PR ESENTED BY: KA R TIK JA IN

 Meaning of Bonds

Bonds are investment products that fall under the fixed income asset class. They are
instruments that allow the government or corporations to raise money publicly or
privately for funding various projects. They pay an interest rate for the money
borrowed. These are issued at a premium or discount to face value or par value.
Upon maturity, face value (principal amount) is paid back to the investors.

Bonds are used by companies, municipalities, states, and sovereign governments to

finance projects and operations
 Types of Bonds
Corporate Bonds

• A Corporate bonds is a type of debt security that is issued by a firm and sold to investors. The company gets the capital it
needs and in return the investor is paid a pre-established number of interest payments at either a fixed or variable
interest rate. When the bonds expires, or "reaches maturity," the payments cease and the original investment is
returned. An investor who buys a corporate bonds is effectively lending money to the company in return for a series of
interest payments, but these bonds may also actively trade on the secondary market.
• Corporate bonds are typically seen as somewhat riskier than U.S. government bonds, so they usually have higher interest
rates to compensate for this additional risk.
• The highest quality (and safest, lower yielding) bonds are commonly referred to as "Triple-A" bonds, while the least
creditworthy are termed "junk".
• Before being issued to investors, bonds are reviewed for the creditworthiness of the issuer by one or more of three U.S.
rating agencies: Standard & Poor's Global Ratings, Moody's Investor Services, and Fitch Ratings. Each has its own ranking
system, but the highest-rated bonds are commonly referred to as "Triple-A" rated bonds.
 Types of Bonds
Government Bonds
• A Government Bonds is a debt security issued by a government to support government spending and obligations.
Government bonds can pay periodic interest payments called coupon payments. Government bonds issued by national
governments are often considered low-risk investments since the issuing government backs them.

• Some government bonds may pay periodic interest payments. Other government bonds do not pay coupons and are sold
at a discount instead.
• Government bonds are considered low-risk investments since the government backs them.
• The various Types of Bonds that are offered by the U.S. Treasury are considered to be among the safest in the world.

• Because of their relatively low risk, government bonds typically pay low interest rates.
 Types of Bonds
Zero Coupons Bonds

• A Zero-coupon bonds, also known as an accrual bonds, is a debt security that does not pay interest but instead trades at
a deep discount, rendering a profit at maturity, when the bonds is redeemed for its full face value.

• The difference between the purchase price of a zero-coupon bonds and the par value indicates the investor's return.
• Some bonds are issued as zero-coupon instruments from the start, while other bonds transform into zero-coupon
instruments after a financial institution strips them of their coupons, and repackages them as zero-coupon bonds.
Because they offer the entire payment at maturity, zero-coupon bonds tend to fluctuate in price, much more so than
coupon bonds.
 Types of Bonds
Convertible Bonds
• A Convertible bonds is a fixed-income corporate debt security that yields interest payments, but can be converted into a
predetermined number of common stock or equity shares. The difference between the purchase price of a zero-coupon
bonds and the par value indicates the investor's return.

• The conversion from the bonds to stock happens at specific times during the bond's life and is usually at the discretion of
the bonds holder.
• A convertible bonds offers investors a type of hybrid security that has features of a bonds, such as interest payments,
while also having the option to own the underlying stock. This bond's conversion ratio determines how many shares of
stock you can get from converting one bonds.
• Types of Convertible bonds:
• Vanilla Convertible bonds: It provides the investor with the choice to hold the bonds until maturity or convert it to stock.
• Mandatory convertible bonds: bonds are required to be converted by the investor at a particular conversion ratio and price level.
• Reverse convertible bonds : It gives the issuer an option to either buy back the bonds in cash or convert the bonds to the equity at a
predetermined conversion price and rate at the maturity date.
 Types of Bonds
Index-Linked Bonds
• An Index-linked bonds is used to protect the income earned by bonds investors against inflation. Index-linked bonds are
linked to a country’s inflation index.

• They are usually constructed by adjusting the bond's principal to inflation figures.
• The UK issues linkers, the US issues Treasury Inflation-Protected Securities (TIPS), and Canada issues Real Return bonds
(RRBs), India issues Capital Indexed bonds (CIBs)(during 1997)
 Types of Bonds
Junk Bonds
• Junk bonds are bonds that carry a higher risk of default than most bonds issued by corporations and governments. Junk
bonds represent bonds issued by companies that are financially struggling and have a high risk of defaulting or not
paying their interest payments or repaying the principal to investors.

• Because of the higher risk, investors are compensated with higher interest rates, which is why junk bonds are also called
high-yield bonds.
 Types of Bonds
Callable (or Redeemable) Bonds
• A Callable bonds, also known as a redeemable bonds, is a bonds that the issuer may redeem before it reaches the stated
maturity date.

• A callable bonds allows the issuing company to pay off their debt early. A business may choose to call their bonds if
market interest rates move lower, which will allow them to re-borrow at a more beneficial rate
• A callable bonds benefits the issuer, and so investors of these bonds are compensated with a more attractive interest
rate than on otherwise similar non-callable bonds.
• There are three primary types of call features, including:
• Optional Redemption: Allows the issuer, at its option, to redeem the bonds. Many municipal bonds, for example, have
optional call features that issuers may exercise after a certain number of years, often 10 years.
• Sinking Fund Redemption: Requires the issuer to regularly redeem a fixed portion or all of the bonds in accordance with a
fixed schedule.
• Extraordinary Redemption: Allows the issuer to call its bonds before maturity if certain specified events occur, such as the
project for which the bonds was issued to finance has been damaged or destroyed.
 Types of Bonds
Puttable bond
• A Puttable bond (put bond or retractable bond) is a type of bond that provides the holder of a bond (investor) the right,
but not the obligation, to force the issuer to redeem the bond before its maturity date. In other words, it is a bond with
an embedded put option. Puttable bonds are directly opposite to callable bonds.

• Some types of put bonds include the multi maturity bond, option tender bond, and variable rate demand obligation
(VRDO).
• If the embedded put option is exercised, the bondholder receives the principal value of the bond at par value. In certain
cases, the bonds can be retracted as a result of extraordinary events. However, more frequently, the embedded put
option can be exercised after a predetermined date.
• The terms governing a bond and the terms governing the embedded put option, such as the dates the option can be
exercised, are specified in the bond indenture at time of issuance. The bond may have put protection associated with it,
which details the period of time during which the bond cannot be “put” to the issuer.
 Types of Bonds
Perpetual Bonds
• A Perpetual bond, also known as a "consol bond" or "perp," is a fixed income security with no maturity date. This type of
bond is often considered a type of equity, rather than debt. the major benefit of them is that they pay a steady stream of
interest payments forever.

• The issuers of perpetual bonds are not under any obligation to ever repay the bond purchaser’s principal amount;
however, the issuer is obligated to make coupon payments in perpetuity – theoretically, forever.
• Perpetual bonds are generally considered a very safe investment, but they do expose the bond purchaser to the credit
risk of the issuer for an indefinite period of time.
 Types of Bonds
Deferred Bonds
• Deferred bonds are one type of bond where the investors do not receive coupon payments until a specific period or till
maturity. These bonds do not pay periodic payments to investors.

• A deferred interest bond can be a good choice for investors seeking a higher rate of interest than a normal savings
account, but investors looking for periodic investment income may not find these bonds to their liking.
• Types of Convertible bonds:
• Z-Bonds : A common type of a deferred interest bond is a zero-coupon bond (z-bond), which pays no interest at all but offers
appreciation in bond value through the par value. The difference between the purchase price and face value repaid at maturity is the
interest earned on the bond for the investor. Since there are no payments prior to maturity, zero-coupons have no reinvestment risk.
Zero-coupon bonds do not technically pay any interest but are instead sold at a discount, maturing to face value.
• Toggle Notes: Another type of deferred interest bonds is a toggle note which can be used by issuing firms with temporary cash flow to
raise debt while staying afloat during times of strained cash flow without defaulting. A toggle note is a loan agreement that allows a
borrower to defer an interest payment by agreeing to pay an increased coupon in the future. Interest will, in effect, be paid for by
incurring additional debt, often at a higher rate of interest. For example, if a company chooses to defer paying interest until the bond
matures, its interest on the debt may increase from 7.8% to 9.1%.
Types of Bonds
Sovereign Bonds
• A sovereign bond is a debt security issued by a national government to raise money for financing government
programs, paying down old debt, paying interest on current debt, and any other government spending needs.
Sovereign bonds can be denominated in a foreign currency or the government’s domestic currency.
• For a sovereign bond, the yield will be higher for countries seen at higher risk of a default. Investors consider the
economic profile of the country, its exchange rate, and politics to estimate the likelihood of a default on sovereign
debt obligations.
• Rating agencies including Standard & Poor's, Moody's, and Fitch Ratings provide sovereign credit ratings for investors
seeking to understand the risks involved in investing in a specific country.
• Some developing countries can't attract foreign investment in bonds denominated in their domestic currency
because foreign investors are unwilling to assume the exchange rate risk. Their currency markets may not be
sufficiently liquid, or investors may not believe the currency will maintain its value because of inflation, eroding their
rate of return.
Types of Bonds
Foreign Currency Convertible Bond (FCCB)
• A Foreign currency convertible bond (FCCB) is a type of bond that is issued in a currency other than the issuer's home
currency. It is issued in a foreign currency, which means the principal repayment and periodic coupon payments will
be made in a foreign currency.
• Convertible bonds fall in the middle of debt and equity financial instruments, both acting as a bond but allowing
investors to convert the bond into stock.
• These kinds of bonds are often listed by large, multinational companies with offices around the world, seeking to
raise money in foreign currencies. FCCBs are generally issued by companies in the currency of those countries where
interest rates are usually lower than the home country or foreign country economy is more stable than the home
country economy.
• Foreign currency convertible bonds are typically issued by multinational companies operating in a global space and
looking to raise capital in foreign currencies. FCCB investors are usually hedge fund arbitrators and foreign nationals.
These bonds can be issued along with a call option (whereby the right of redemption lies with the bond issuer) or put
options (whereby the right of redemption lies with bondholder).
 Types of Bonds
Eurobond
• A Eurobond is a debt instrument that's denominated in a currency other than the home currency of the country or
market in which it is issued. Eurobonds are important because they help organizations raise capital while having the
flexibility to issue them in another currency.

• Eurobond refers only to the fact the bond is issued outside of the borders of the currency's home country; it doesn't
mean the bond was issued in Europe.
• Issuance of Eurobonds is usually handled by an international syndicate of financial institutions on behalf of the borrower,
one of which may underwrite the bond, thus guaranteeing the purchase of the entire issue.
 Bibliography
• https://www.investopedia.com/

• https://corporatefinanceinstitute.com/
• https://www.investor.gov/
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