Types Of Bonds

Bond - 

          -  "Bonds are the securities which represent a loan".

Some Important terminologies used in bonds :-

           · A loan amount = Principal Amount .

           · Maturity = Time fir which the loan is taken .

           · Rate at which loan is taken also known as coupon . 

Image Credit - ptaindia.com

There are many, different types of bonds, some important types of bonds are discussed bellow -

1) Zero-Coupon Bond -

Bonds which do not pa any coupon (interest) are known as zero-coupon bonds .

    Rate on these bonds is not calculated in the form of

 coupon (interest) but calculated as difference between issue price and redemption value .

These bonds are issued at discount price of their face value and are redeemed as par. These types of bonds come with some maturity period.

EXAMPLES -

    Treasury Bills also known as T-Bills, These are generally issued by Government ,Commercial paper issued by corporates and certificate of deposits issued by banks and financial institutes .

Maturity value are already decided for these types of bonds.

2) Floating-Rate Bonds - 

These are the bonds, their coupon are not fixed and charges with respect to inflation, rate fluctuates after every six months.

   *   These bods are useful in the high inflation rate scenario .

3) Amortization Bonds -

These bonds pay on the bases of interest as well as some portion the principal value, housing loans, auto loans and consumer loans are example of these types of loan .

   e.g. A person has to pay EMI (Equated Monthly Installment) . Some amount every month and interest component decreases every month and principal amount increases.

4) Collable Bonds -

Collable Bonds allow the issuer to redeem the bonds prior to their original maturity date. These type of bonds are risky for investor but beneficial for the issuer .

EXAMPLE -

      A ten year bond may be issued with call option at the end of the 5Th year such as in the SBI bond illusion below .

Chart -

SBI Bond 2011 Series 3

Issuer      SBI

Credit Rating                  Care AAA

Face Value                         10000/-

Issue Price                         10000/-

Interest Payment                Annual

Coupon                               9.75 %

Tenor                                   10 years

* Call option SBI has the option to redeem outstanding principal and interest due after 5 years and one day from the date of allotment .

5) Puttable Bonds -

A puttable bond gives the investor the right to seek redemption from the issuer before the original maturity date. This is opposite of collable option. In this bonda investor has a put to redeem principal amount before maturity, At this point the risk is on issuer's side.

6) Payment In Kind (p/k) Bonds -

In these kind of bonds coupons are not paid in cash but in the way, by giving some more bonds. By nature these bonds are more risky, hence these types of product is for high risk investor.

7) Principal Protected Note- 

In these bond, portion of the amount is invested in debt in such a way that it matures to the principal amount on the expiry of the term of note.

8) Inflation-Protected Securities-

These are (inflation indexed bonds) are category of government securities issued by the RBI which provide inflation protected return to the investor . In India, inflation indexed bond have been launched in which both principal and interest are adjusted for inflation. These bonds have fixed real coupon rate which applied to inflation adjusted principal on each interest payment date .

So this is it on the bonds , required, important stuff is in the blog, now you just have to do little more research to pick one bond for yourself .

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