Meaning of Bonds and their types
Posted Date: 28-Aug-2010
This resource contains meaning of bonds and their types.
Bonds is a negotiable certificate evidencing indebtedness.It is normally unsecured.A debt security is generally issued by a company,municipality or government.A bond investor lends money to the issuer and in exchange,the issuer promises to repay the loan amount on a specified maturity date.The issuer usually pays the bond holder periodic interest payments over the life of the bond.
DIFFERENT TYPES OF BONDS:
1)Zero coupon bond-This bond is issued at a discount and repaid at a face value.No periodic interest is paid at the time of maturity.The difference between the issue price and the redemption price represents the return of the holder.
2)Deep discount bond-This bond is issued at a very high discount on its face value and face value is paid at the time of maturity.IDBI and SIDBI had issued this instrument .IDBI had issued deep discount bond of face value of Rs.1 lac at a price of Rs.2,700/- with a maturity period of 25 years.The bond appreciates to its face value over the maturity period of 25 years.Alternatively,the investor can withdraw from the investment periodically after 5 years.
3)Convertible Bond-A bond gives the investor the option to convert the bond into equity at a fixed conversion price.
4)Dual convertible bond-A dual convertible bond is convertible into either equity shares or debentures/preference shares at the option of the investor.
5)Stepped coupon bonds-Under stepped coupon bonds,the interest rates is stepped up or down during the tenure of the bond.The main advantage to the investor is the attraction of higher rate of interest in case general rise in interest.
6)Disaster Bonds-These are issued by companies and institutions to share the risk and expand the capital to link investors return with the size of investors losses,the smaller the return and vice-versa.
7)Easy exit bonds-Easy exit bonds are bonds which provide liquidity and easy exit route to the investor by way of redemption where investor can get ready encashment in case of need to withdraw before maturity.
8)Floating rate bonds and notes-In this case,interest is not fixed and is allowed to float depending upon market conditions.This instrument is used by the issuer to hedge themselves against the volatility in interest rates.
9)Capital Indexed Bonds- These bonds are inflation protection securities.Such bonds,therefore,provide good hedge against inflation risk.The return to the investors in these bonds is connected with the wholesale price index.
10)Commodity Bonds-Commodity bonds are bonds issued to share the risk and profitability of future commodity prices with the investors.For example,Petro bonds,gold bonds ,silver bonds etc.
11)Industrial revenue bonds-These are issued by financial institutions in connection with the development of the industrial facilities.These may become attractive if certain income tax and wealth tax concessions are offered.
The bond proceeds could be used to purchase or construct facilities which are subsequently leased or sold to the company.
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