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What are Bonds?

Organizations in order to raise capital issue bonds to investors which is nothing but a financial contract, where the organization promises to pay the principal amount and interest (in the form of coupons) to the holder of the bond after a certain date (also called maturity date). Some bonds do not pay interest to the investors, however, it is mandatory for the issuers to pay the principal amount to the investors.

Types of Bonds

Fixed Rate Bonds

In Fixed Rate Bonds, the interest remains fixed throughout the tenure of the bond. Owing to a constant interest rate, fixed-rate bonds are resistant to changes and fluctuations in the market. The fixed rate is mentioned in the trust indenture during the issuance and it is payable on specific dates until your bond gets matured. The major benefit of owning this bond is that you know with certainty how much interest you will earn and for how long. As long as the bond issuer does not default or call in the bonds, you can predict exactly what your return on investment will be.

Floating Rate Bonds

Floating rate bonds have a fluctuating interest rate (coupons) as per the current market reference rate. Its interest rate is tied to a short-term benchmark rate, such as LIBOR or the Fed funds rate, plus a quoted spread, or rate that holds steady. Many of these bonds have quarterly coupons, which means that they pay interest four times a year, while few of them pay on monthly basis, and even semi-annually, or annually. It appeals to investors because it can benefit from higher interest rates as the rate on the floater adjusts periodically to current market rates.

Zero Interest Rate Bonds

Zero Interest Rate Bonds do not pay any regular interest to the investors. In such types of bonds, issuers only pay the principal amount to the bondholders. When the bond matures, the bondholder is repaid an amount equal to the face value of the bond. Since, they offer the entire payment at the maturity, these bonds tend to fluctuate in price, much more so than other bonds.

Inflation-Linked Bonds

Bonds linked to inflation are called inflation-linked bonds. The interest rate of Inflation-linked bonds is generally lower than fixed-rate bonds. When a corporation takes out debt, it normally issues two or more bond types that are either unsubordinated debt or subordinated debt. The higher priority debt is considered unsubordinated debt.

Perpetual Bonds

The bonds which have no maturity dates are known as perpetual bonds. Holders of perpetual bonds enjoy interest throughout. Issuers pay coupons on perpetual bonds forever, and they do not have to redeem the principal. Perpetual bond cash flows are, therefore, those of a perpetuity. Most perpetual bonds issued nowadays are deeply subordinated bonds issued by banks.

Subordinate Bonds

Subordinate bond is a debt bond which ranks after other debts if a company falls into liquidation or bankruptcy due to any reason. When a corporation takes out debt, it normally issues two or more bond types that are either unsubordinated debt or subordinated debt. The higher priority debt is considered unsubordinated debt.

Bearer Bonds

Bearer Bonds do not carry the name of the bondholder and anyone who possesses the bond certificate can claim the amount. Bearer bonds are also called coupon bonds because the physical bond certificates contain attached coupons that are redeemable by an authorized agent, for biannual interest payments.

Serial Bonds

Serial bonds are financial bonds that mature in installments over a period of time as it a series of different securities. Each maturation segment in the serial bond is issued concurrently, with the terms of the repayment schedule spelled out in the offering prospectus. Serial bonds do not utilize sinking funds, and instead rely on the revenues generated from the project that the bond is used to fund, making them popular for certain municipal bonds.

Benefits of Bonds

Safe & Easy

Bonds are one the safest options of investment in the market with the advantage of ease of access.

Predictable Returns

Bonds are safest because they give to our money with the greatest predictable returns.

Better Interest Rates

You get more interest rates on bonds than the deposit rates on your savings bank account.

Stable Income

Bonds contribute to generating a stable income as a safe and conservative investment option.

Wide Variety

There are a variety of different bonds to fit in different needs of investors.

Legal Protection

In some countries, you get some money back ( the recovery amount ) if the company goes bankrupt.