Bonds
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
Inflation-Linked Bonds
Perpetual Bonds
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
Serial 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.