A bonds is generally a form of debt which the investors pay to the issuers for a defined time frame. In a layman’s language, bond holders offer credit to the company issuing the bond.If a business wants to expand, one of its options is to borrow money from individual investors, pension funds, or mutual funds. The company issues bonds at various interest rates and sells them to the public.
Types of Bonds
Following are the types of bonds:
Fixed Rate Bonds
In Fixed Rate Bonds, the interest remains fixed through out the tenure of the bond. Owing to a constant interest rate, fixed rate bonds are resistant to changes and fluctuations in the market.
Floating Rate Bonds
Floating rate bonds have a fluctuating interest rate (coupons) as per the current market reference rate.
Zero Interest Rate Bonds
Zero Interest Rate Bonds do not pay any regular interest to the investors. In such types of bonds, issuers only pay the principal amount to the bond holders.
Inflation Linked Bonds
Bonds linked to inflation are called inflation linked bonds. The interest rate of Inflation linked bonds is generally lower than fixed rate bonds.
Bonds with no maturity dates are called perpetual bonds. Holders of perpetual bonds enjoy interest throughout.
Bonds which are given less priority as compared to other bonds of the company in cases of a close down are called subordinated bonds. In cases of liquidation, subordinated bonds are given less importance as compared to senior bonds which are paid first.
Bearer Bonds do not carry the name of the bond holder and anyone who possesses the bond certificate can claim the amount. If the bond certificate gets stolen or misplaced by the bond holder, anyone else with the paper can claim the bond amount.
War Bonds are issued by any government to raise funds in cases of war.
Bonds maturing over a period of time in installments are called serial bonds.
Climate Bonds are issued by any government to raise funds when the country concerned faces any adverse changes in climatic conditions.