Types of Bonds-  Meaning &  Features

Meaning

Bonds are kind of fixed-income instruments that is used by an investors to lend money directly to corporate or governments.  A bond may be included as an IOU between lender and borrower that includes details of loan repayment and its payments; they’re commonly used by companies, municipalities, states, and sovereign governments as financing solutions for projects and operations. Owners of bonds are referred to as debtholders or creditors of the issuer.

Bond details include information about when the principal amount of the loan to be returned to the bond owner. It often includes terms regarding variable or fixed interest payments made by borrowers

Features of Bonds

Bonds have various features that investors should take into consideration. The popularity of this debt instrument can be attributed to some intrinsic factors as mentioned below.

• Face Value

The face value of bonds issued by an enterprise refers to the price per unit of bond issued, also referred to as principal, nominal, or par value. Issuers have a legal responsibility to return the value of securities within an agreed time period.

• Coupon Rate

Bonds accrue either fixed or floating rates of interest over their duration, payable periodically to creditors. Bond interest accrual rate is also known as coupon rates due to the tradition of credit claiming their money in the form of coupons from paper bonds.

• Tenure

Tenure or term refers to the period during which bonds mature. These are financial debt contracts between issuers and investors. It is a financial and legal obligation of an issuer to an investor or creditor only last until this tenure’s conclusion.

• Tradable

Bonds are liquid assets that are traded on secondary markets. Enabling investors to transfer ownership over time. Creditors frequently sell off bonds when market prices surpass nominal values as this gives them an option for investments with high yield potential and appropriate credit ratings.

Types of Bonds

Bonds are debt securities that serve as loans from investors to borrowers – typically companies or government entities. There are various types of bonds, each has its own set of characteristics and features. These are some common types of bonds include:

• Corporate Bonds

Corporate bonds are issued by corporations to raise capital. They provide regular interest payments and principal amount at maturity. There are two categories of corporate bonds: investment-grade (lower risk), and high-yielding bonds with greater risks for higher returns.

• Government Bond

Treasury Bonds: Issued by the U.S. government, these instruments are considered as low-risk with fixed interest payments. Examples include T-bills (T-bills), notes, and bonds.

Municipal bonds: State and local governments issue bonds to fund public projects. Interest income provided by municipal bonds is typically exempt from federal income taxation.

• Zero Coupon Bond

These bonds do not pay any regular interest, but they are sold at a discount to face value and then at maturity, the full face value will be returned as repayment. The return is the difference between purchase price and face value.

• Floating Rate Bond

These bonds fixed interest rates are not fixed. The Bond rates fluctuate with changes to benchmark rates such as LIBOR or the federal funds rate, providing some protection against rising rates.

Before investing, it is crucial to understand the individual features and risks associated with each type of bond, as they can vary significantly in terms of risk, return and tax implications.