What is a Bond?

A bond, also known as a fixed-i

ncome security, is a debt instr
ument created for the purpose o
f raising capital. They are ess
entially loan agreements betwee
n the bond issuer and an invest
or, in which the bond issuer is
obligated to pay a specified am
ount of money at specified futu
re dates.
FEATURES OF BONDS

Par value refers to the value stated on the face of the

bond, which shows the amount which the company or
government body promises to pay at the time of
maturity.
Coupon Rate is nothing but the fixed rate of interest
payable to the bondholder.
Maturity Date is the date at which the bond gets
matured, and the principal amount is paid to the
bondholder.
Redemption Value is the value paid to the
bondholder, at the time of expiry of the term for which
bond is issued.
 TYPES OF BONDS
• Convertible and non convertible bonds
Convertible bonds let a bondholder exchange a bond to a number of sha
res of the issuer's common stock. These are known as hybrid securities,
because they combine equity and debt features.Convertible bonds may
be fully convertible or partly convertible bonds.
Non-convertible bonds are those that have no conversion clause i.e. they
bare not to be converted into equity shares after a specified period.
• Redemable and irredeemable bonds
Redeemable bonds are the bonds which are to be redeemed by the issui
ng company after the expiry of a specified period known as maturity peri
od.
Irredeemable bonds on the other hand have infinite time horizon as no
maturity period is specified in this case. They are also referred to as perp
etual bonds.
Zero Coupon Bond
The bonds which do not carry periodic interest payment is called
zero coupon bond. The issuance of these bonds are made at a
steep discount over its face value and repaid at face value on
maturity.
Deep discount bond
A type of zero interest bonds which are offered for sale at
discounted value and is redeemed at face value on its maturity.
Secured and unsecured bonds
Secured bonds are those bonds for which the issuer company
provides some assets as security or mortgage with bond trustee. If
the comoany fails to pay interest or repay the principal amount,
then the asset is sold to recover such amount. In unsecured bonds
no such asset is kept as security.
Putable bonds
Putbale bonds have a "put option". Put option is the right of a
bondholder to ask for redemptionafter a specified period but
before maturity. Generally bondholders exercise their put
options, when market interest rate goes up and becomes
significantly higher than the coupn rate.
Callable bonds
Callable bonds are bonds that give the issuer the right to
redeem or buy back all or part of the bond before it matures. A
call provision is beneficial to the issuer because if they are able
to issue bonds at a lower interest rate they can call the bonds
and do so. Issuing bonds at lower interest rates simply means
that it will cost the issuer less.
Deep Discount Bond
A deep discount bond is a zero coupon bond (i.e. no interest
before maturity like fixed deposits) with a considerably longer
maturity (say 15 years or more). As the lack of coupon payments
and long term of the bond suggest, these bonds are issued at a
deep discount to the face value.

Tax-free bonds
Tax free bonds are types of goods or financial products, which
the government enterprises issue. One example of these bonds is
the municipal bonds. They offer a fixed interest rate and hence is a
low-risk investment avenue. As the name suggests, its most
attractive feature is its absolute tax exemption as per Section 10 of
the Income Tax Act of India, 1961. Tax-free bonds generally have a
long-term maturity of ten years or more. Government invests the
money collected from these bonds in infrastructure and housing.
Junk bonds
Junk bonds are high-paying bonds with a lower credit rating than
investment-grade corporate bonds, Treasury bonds, and municipal bonds.
Junk bonds are typically rated 'BB' or lower by Standard & Poor's and 'Ba'
or lower by Moody's.
Treasury bond
A government bond, also called Treasury bond, is issued by a national
government and is not exposed to default risk. It is characterized as the
safest bond, with the lowest interest rate. A treasury bond is backed by the
“full faith and credit” of the relevant government. For that reason, for the
major OECD countries this type of bond is often referred to as risk-free.
Municipal bond
Municipal bond is a bond issued by a state, U.S. Territory, city, local
government, or their agencies. Interest income received by holders of
municipal bonds is often exempt from the federal income tax and from the
income tax of the state in which they are issued, although municipal bonds
issued for certain purposes may not be tax exempt.
• Floating rate bonds
Floating rate bond have a variable coupon that is linked t
o a reference rate of interest, such as Libor or Euribor. For
example, the coupon may be defined as three-month USD
LIBOR + 0.20%. The coupon rate is recalculated periodicall
y, typically every one or three months.
• Inverse floaters bonds
Inverse floaters bonds are those floating rate bonds, the c
oupon rate of which mobe in the oppoaite direction of th
e linked base rate.For example, an inverse floating-rate no
te may be linked to LIBOR; as the LIBOR decreases, the co
upon rate increases and vice versa. An inverse floating-rat
e note allows a bondholder to benefit from declining inter
est rates. It is also called an inverse floater.
• International bonds
International bonds are bonds issued by a country or com
pany that is not domestic for the investor.There are two ge
neral categories for international bonds: euro, and foreign.
Eurobonds: Underwritten by an international company usi
ng domestic currency and then traded outside of the coun
try’s domestic market. Example:A British company issues d
ebt in the United States with the principal and interest pay
ments denominated in pounds.
Foreign bonds: Issued in a domestic country by a foreign c
ompany using the regulations and currency of the domesti
c country.Example:: A British company issues debt in the U
nited States with the principal and interest payments deno
minated in dollars.