Different TYPES of BONDS

bonds different types

For a business to be successful they should execute plans or strategy that may help them to grow. But how does business grow? Probably one answer is to follow the cycle of strategic management so that they can maximize corporate and share holder’s wealth.

            It begins from getting and acquiring source of funds at a possibly low cost, where they can give own capital to finance business or issue stocks, through government aid, issue stocks or through credit and issuing bonds.

In finance, bond is considered a certificate of indebtedness of the bond issuer to the holder. It is a debt security, which the issuer owes to the holder a specific amount of debt depends to bond terms. It is obliged to pay with interest and repay the principal on a fixed date or its maturity date. It is often that the bond is negotiable or can be transferred from one person to another holder. But sometimes it can be transferred to secondary market. The bond is a form of loan where the holder of the bond is the creditor and the issuer is the debtor or borrower. And the interest rate is called coupon. Bonds can finance future, current and long term investments.

Either stocks or bonds are considered a security the only difference is that the stock is the equity of shareholders in the company or investors and the bonds are credit stakes in the company or the lenders.

Different type of Bonds

  1. Government Bonds- it is known also as sovereign bonds, it’s a bond issued by national government with guarantee to pay a periodic interest and reimburse the face value when it become matured. It is usually denominated on its own home currency. Government bond is issued to support government spending. Borrowing to a national government denominated on its own country’s currency are free from credit risk, because the government can impose high taxes or simply print multiple bills to repay the bonds.
  1. Municipal Bonds – Also referred as minus, these kinds of bonds are free from federal tax. But it is next to series when it comes to risk. Moreover, Local governments usually make their debt non taxable for its residents. Although it is not 100% tax free, still its tax savings is lower than the other type of bonds. But this tax-exemption is only applies to its interest. Depending on situation. When it comes to after tax basis, Municipal bonds can be a great investment. It maturity is 1 to 30 or 40 years.
  1. Corporate Bonds- Just like issuing stocks a company can also issue bonds, large business and corporation is much flexible on the level of debt they can issue. Corporate bonds have a higher yields as well as higher risk because unlike government company may be default in paying the obligation. Usually, the short term corporate bonds matures for less than five years and the intermediate is five to twelve years. The company credit capability and quality is really important. If there is high quality, the investors receive a lower interest rate. It is the most pleasing income investment because of the risk the investor should obtain. Variations include a callable bonds that can be redeemed by the company prior to its maturity and convertible bonds, which it can convert to stocks by the holder. Junk bonds normally pay higher yield than this type of bonds.
  1. Zero-Coupon Bonds- Also referred as zeros or This type of bond is sold by brokers for it is a treasury based security. The face value can be redeemed prior to its maturity in 6 months to 30 years. It is also a profound discount rate considerable to par value. Even the interest wasn’t able to receive until the bond matured, still should pay taxes every year on the phantom interest earned it is based on bond market worth or value which rises as you hold it. It is the best tax deferred account for no payment for coupon. And its price is volatile. For example there are zero coupon bonds with $500 par value and 5 years maturity trading at $200. You’d be paying $200 today for the bond $500 worth in 5 years.
  1. Convertible Bonds- This type of bonds sometimes called Issuing convertible bonds is one of the companies’ ways to lower or minimize negative investor interpretation to the corporation. These bonds probably redeemable for a prearranged amount of the company’s equity at a certain times. It is more likely able to convert into equity.

For investors, convertible bond has a value added section built into it. For it is a bond with the option to convertible into stocks. Consequently, it likely is a lower rate of return for the value of the option to trade or deal the bonds into stock.

  1. Callable Bonds- Also referred as redeemable bonds, it can be redeem by issuer on its maturity. Normally, when the bond is called, premium will be paid to bond owner. The major cause of call is interest declines, declining of interest rates will give the company an idea to redeem the bond and refinance it with lower interest. The company will reissue new current bond, a low interest bonds to save and keep money.
  1. Term Bonds- This bonds is same issue and share same maturity dates. It can also be redeemable at an earlier date than other issued bonds. But the Call feature is made with the agreement of bond issuer and the buyer called indenture, this is a schedule of redemption with price, and maturity date.

Term bond is the opposite of serial bonds where has a various maturity schedule, a t a regular time until it retired.  Some of municipal and corporate bonds are term bonds example, for it has 10 year call features.

  1. Amortized Bonds- This type of bonds is treated as an asset. It is a financial official document or official document that the worth or value has been lessen in recording on accounting statement. Its discount was amortized to the interest expense over the bond life. It is below the face value if the bond it issued with a discount. The discount is treated either expense or amortized asset. Amortization, an accounting method that normally reduces the cost value of an intangible assets limited life. It allows the bond issuer to treat the bond discount as an asset until it’s matured.
  2. Adjustment Bonds- During restructuring of a corporation, this type o bonds is given to the bondholders of a value of outstanding bond issue for The obligation is being combined or consolidated and transferred from the outstanding bond issue to this type of bond. It is used to accomplish and effectively recapitalizes the company’s outstanding obligation. Such as length of maturing or the interest rates. So that the company will be able to meet its obligations. This is how it works, if the company is at risk and should protect the creditors; probably it will be hard for them to cover their obligation. By that they will liquidated and the value collected will distribute to its creditors. Yet, creditors will receive a portion of original loans to the company. Then the company and its creditors will make a way to recapitalize debt obligations. Thus, the company will be able to meet its obligation, as well as they can continue operations. Accordingly there would be a higher value a creditor will receive.
  3. Junk Bonds- It is also called as speculative or high yield bond; it has a high default risk rated as “BB” Normally its interest rate is three to four higher than government issues. It is a default distinct possibility that is issued by companies or financing with a weak balance sheets. For the high yield prices will be tied to the condition corporate balances. But it doesn’t provide same benefit by mixing high yields grade bonds and stocks.
  1. Angel Bonds- This type of bond is pay with low interest rate that why it is called an investment grade bonds issued by a company at a high credit rating. It is opposite to fallen angels which a type of bond that have been given a “junk” rating. Thus, it is more risky type of bond. Angel bond is rated as minimum “Baa” by Moody’s and by S&P and Fitch rated as “BBBB”. Its principal is reduced is the company is unable to pay back the bond.
  1. Treasury bonds– To finance government deficit, treasuries has been issued by the government. These kinds of bonds have the longest maturity, 10 years. And the interest same with treasury notes should be paid semiannually and being sold at $1,000 denomination. They are considered credit-risk free. For it is backed by taxing authority of Uncle Sam. The yields of Treasury bond are typically going to be lowest except tax free minus.  The interest is exempt from income tax of the state. And during economic recession they perform better than those higher-yielding bonds.
  1. Foreign bonds– These is something in total and altogether. Often, it is denominated in dollar. With a foreign currency fund, the issuer promises and agrees to make fixed or certain amount of interest payments. And to return the principal in a new currency. The size of payment is depends on exchange rates when converted into dollar. If the dollar currency strengthens against the other, then the interest payments would be lower and if dollar weakens the result will be vice versa.  Exchange can definite determine how this type of bonds works.
  1. Mortgage-backed bonds- these bonds represent an ownership stake in a package of mortgage loan. Guaranteed and issued by the agencies in government. The interest is taxable and paid monthly, with the partial repayment of its value or principal. It is usually yield between 2-4% more than treasuries. It is a kind of bonds with prepayment risk. Because its value getting low or drops when the prepayments of mortgage rise.
  1. Secured bonds – Since it is secured this type of bonds are backed up by collateral, such as titles which transferred to bond holders in the default event. Mortgage bonds are the most common form of this bond. This is backed up by real estate properties or equipment that can be liquidated. Thus, it is considered to be high grade investments and safe investment. Or if there are projects it is secured by revenue. If the issuer either has unsecured or secured bonds then in terms of default event, secured bond holders receive payments first then the unsecured bond holders.
  1. Unsecured bonds- Opposite with secured bonds, it doesn’t have a pledge or collateral. Or it is not backed up by any assets. So if bankruptcy occurs repayment is not certain. This is only backed by full credit and faithful or issuer or the issuing company. The unsecured bonds are also known as debenture.
  1. Registered bonds– A type of bond where possessor or holder is registered with the bond issuer. The necessary information about client such as name, contact number and many more are recorded and should pay the bonds coupon payment to the specific person. If a bond is in a tangible form the name of the owner is printed on a certificate. This bond is tracked electronically and the information is recorded in the computer.  It is opposite of bearer bonds that has information about the owner. Bearer bonds should pay the principal or the coupon the holder of physical certificate.
  1. Unregistered (bearer) bonds- The bearer bonds or an unregistered bond is owned by whoever is the holder. Other than having registered owners. It has a stated maturity dates and interest rate. And its coupon representing the interest was directly attached to the security and must be present to the company for sum certain payment.  This is different from other kind of bonds for it is not physically issued but rather recorded in the computer of custodians and brokers
  1. Bonds with stock warrants- Warrant is derivatives that grant a right but not obligation, to buy or sell security usually equity. With a certain price before it expires. Exercise price or strike price is the price at which it is usually can be bought or sold. The warrant can be worked out any time on or before the expiration date. The right to buy a security is referred to call warrants and the right to sell is put warrants.
  1. Fixed rate bonds- In owing this type of bonds investors can identify the certain some of cash they will make and how long. It is because the bond was paid the same amount of interest for the whole term of the bond. The bondholder can predict his or her return of investment.  Definitely an inventor who wishes to earn an interest with a certain amount should bought or acquire a fixed rate municipal, treasury or corporate bond.
  1. Floating rate notes- This type of bond has a variable coupon, that is same to money market reference rate such as federal funds rate, LIBOR additionally the quoted margin or quoted spread. The spread rate remains the same. These FRNs normally have quarterly coupons. The coupon was calculated each period by getting the fix reference rate and adding the spread also, they should pay out interest every three months. It is also referred as Usually, 2 to 5 years term of maturity.
  1. Coupon bonds- A type of investment bond that is paid with interest representing the coupon. It is also referred to bearer bonds in which the coupon is attached and represents a interest with specific rate semiannually payment. There is no record about the issuer is being kept and the buyer’s name is of indicated on the certificate.
  1. Exchangeable bonds- when purchasing its type of bond the holders has and gives an option to exchange the bonds into stock of the company. At some future with prescribed terms and conditions. This is not similar to convertible bonds, which grant the holder to convert the bond into stock or other securities. Because the exchangeable bonds usually a subsidiary. It is a hybrid debt security.
  1. War bond- It is the type of bonds that issued by the government to finance military operations during war time. It’s is also the kind of bond that offer a low rate of return, below the market rate that is the reason where citizens appeal emotional to patriot to lend the government their money.
  2. State and local governments (munis) – The local or state government issued muni bonds to finance special projects like highways. The interest where investors receive is exempted from some income taxes. It is usually their way to raise capital or acquiring sources of funds. It is sometimes called municipal certificate.

To raise capital one of the good idea is investing on bonds. For those bonds with higher yields can increase you income and bonds benefit is capital appreciation, It provide security if the company is at risk and is liquidated bond holders usually receive the first priority first before its stockholders.  So don’t be afraid on investing on bonds. For they especially on government bonds with your own currency for they can able to pay you by increasing tax or print your own country’s domestic currency.

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