Bonds are a type of investment that typically offers a fixed return and serves as a source of regular income. Bonds are a popular investment option among investors who prefer to invest in low-risk instruments. Different types of bonds are available in the market, each with different features and characteristics that cater to the needs of diverse investor groups. In this article, we will discuss the different types of bonds that are commonly available in the market.
List of Different Types of Bonds
The following are the different types of bonds:
1. Fixed-rate bonds
Fixed-rate bonds are the most common type of bonds. These bonds pay a fixed interest rate over the life of the bond. This ensures that the bondholder receives a fixed amount of income for the period of the investment.
2. Floating-rate bonds
Floating-rate bonds are bonds whose interest rate is adjusted periodically according to the market conditions. The interest rate on these bonds fluctuates with changes in the market rate.
3. Zero-coupon bonds
Zero-coupon bonds are bonds that do not pay interest. Instead, these bonds are offered at a discount to their face value, and the investors receive the full-face value of the bonds at maturity. These bonds are also called deep discounted bonds.
4. Puttable Bonds
These bonds grant the bondholder the right to compel the bond issuers to repurchase the debt securities prior to their predetermined maturity date. However, whether to avail this right is entirely at the discretion of the bondholder. They are not obligated to exercise this option.
5. Convertible Bonds
Convertible bonds are a type of hybrid security that offer both fixed interest payments and a pre-determined option to convert to a specific number of equity shares within a specific timeframe at a set price. The investor has a voluntary option to convert, which creates an opportunity for them to become a shareholder of the company. Additionally, convertible bonds offer investment flexibility for companies as they provide a lower interest rate than traditional corporate bonds and the potential for future equity.
6. Callable Bonds
These bonds offer greater flexibility to corporations or governments to redeem the bond issue before their scheduled maturity date. Callable bonds typically offer higher interest rates to compensate investors for the additional risk, but the bond price may rise less if interest rates fall. Investors must review the bond prospectus carefully before investing to understand the terms, conditions, and early redemption clause associated with the callable bond.
7. Perpetual bonds
Perpetual bonds are bonds that do not have a maturity date. They provide a fixed interest payment to bondholders indefinitely. Perpetual bonds are popular for their steady and reliable income stream.
8. Inflation-linked bonds
Inflation-linked bonds are bonds that offer a return that is indexed to the inflation rate. As inflation rises, so does the interest rate on these bonds. This ensures that the return on the investment keeps pace with inflation.
9. Treasury bonds
Treasury bonds are issued by the central government. This makes them the safest bond type as they do not have any credit risk. Mostly, these bonds mature in ten to thirty years and offer a fixed interest rate, which is influenced by market conditions.
10. Municipal bonds
Municipal bonds are issued by local and state governments, mostly to finance projects like schools, hospitals, and highways. Investors must note that these bonds offer tax exemptions, and some offer short-term and long-term maturities.
11. Corporate bonds
Corporate bonds are issued by companies to raise capital for their operations. They are rated based on the creditworthiness of the issuer. Hence, they are riskier than treasury bonds. Furthermore, their maturities and interest rates vary based on market conditions and issuer credibility
12. High-yield bonds
High-yield bonds are also called as junk bonds. Mostly, they are issued by companies with lower credit ratings. These types of bonds are riskier than investment-grade bonds due to a high risk of default. Thus, to attract investors, these bonds offer higher yields to offset the higher risk.
13. Mortgage-backed securities
Mortgage-backed securities are created by real estate firms. You can think of them as a basket holding several home loans. These securities pool several mortgages and issue bonds against them. They derive cash flow from the mortgages, which makes them safer than corporate bonds due to reduced credit risk.
