Types of Bonds?
(A) Based on Coupon / Interest
1. Fixed rate bonds:
Fixed rate bonds have the coupon that is constant throughout the life of the bond.
2. Floating rate bonds:
These bonds have a variable rate of interest. Interest rates are recalculated periodically.
3. Zero coupon bonds:
No coupons are paid to zero coupon bonds. The bond is issued at a discount. On maturity, these bonds are redeemed at par. The difference between the acquisition cost of the bond and the face value of the bond is the profit to the investor.
4. Deep Discount bonds:
These bonds are similar to zero interest bonds but have a huge discount and a long period of maturity (i.e., 25 years and more). These bonds are not entitled to any interest. The difference between cost and maturity value is the profit for the investor.
5. Inflation-indexed bonds:
The principal amount of the bond and the interest payments are indexed to inflation. The principal amount grows and the payment of interest increases with inflation.
(B) Based on Option
1. Bond with call option (Callable bonds):
This feature gives the issuer the right to redeem his issue of bonds before maturity at a pre-determined price and date.
2. Bond with put option (Putable bonds):
This feature gives the bondholder the right to sell their bonds back to the issuer at a pre-determined price and date.
(C) Based on Redemption
1. Bonds with single redemption:
In this case, the principal amount of the bond is paid at the time of maturity only.
2. Amortising Bonds:
In this case, the payment made by the borrower on maturity includes both interest and principal components throughout the life of the bond or at specified intervals.
