A bond is a debt security issued by a government, its agency, or a corporate institution as a means of raising funds. A bond is also a negotiable certificate evidencing indebtedness that the issuer owes the bondholders.
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 most common types of bonds are municipal bonds and corporate bonds. The issuer usually pays the bondholder some periodic interest payments over the life of the bond.
Types of Bonds:
(1) Convertible Bond: This is a type of bond that gives the investors an option to convert the bond to other securities (equity) at some future date under prescribed conditions (fixed conversion price).
(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. It sells at a discount rate, a rate that is below the original face value.
(3) Dual Convertible Bond: A dual convertible bond is convertible into either debentures or equity shares.
(4) Bearer Bonds: This is also called a registered bond, the holder of this bond presents coupons and is paid interest and the owner of the registered bonds appears on the records of the issuers of the bonds.
(5) Stepped Coupon Bond: This bond changes. The interest rate is stepped up at predetermined levels over time. The interest rate is stepped up or down during the tenure of the bond. e.g. A stepped coupon bond might pay 10% interest for the first 5years after the issue and then step up the interest every fifth year until maturity.
(6) Floating Rate Bond and Notes: In this type of bond the interest fluctuates. It is a variable coupon which is equal to the money market rate. The Interest is not fixed and is allowed to float depending on market conditions. It is also called quoted margin.
(7) Commodity Bonds: These are the bonds that are debt securities in which the bond’s value is related to the commodity price. These bonds are issued to share the risk and profitability of future commodity prices with the investors e.g. petro bonds and gold bonds.
(8) Capital Indexed Bond: This type of bond provides protection securities from inflation. Such bonds, therefore, provide a good edge against inflation. It is a bond whose base payment rises and falls with the Consumer Price Index, etc.