How Many Types of bonds are there in Finance?
Meaning of Bonds:- It is a negotiable instruments as evident of debt for the company. Capital is raised through the bonds. Bond is an unsecured documents. Investors lends money to the company in exchange of bonds. on which company pay fixed interest til the specified maturity date.
In other words:- It is a loan agreement between investors and bond issuer. Thus issuer company is obligated to pay a specified amount at specified future dates. Bond holder has a greater claim on income of the issuer than a shareholder in case of liquidation. How many types of bonds are there in finance?
TYPES OF BONDS
These various types of bonds are classified in the following categories.
- Income Bond
- Deep Discount Bond
- Inflation Linked Bonds
- Option Bonds
- Secured Premium Bonds
- Foreign Currency Convertible Bonds
- Floating Rate Bonds
- Convertible Bonds
- Foreign Bond
- Zero Interest Bonds
( 1 ) Income Bond:- Income bond is that on which interest is paid to the investors in case of adequate income flow of the issuer company. If there is no profit than no profit is paid to the investors in that year. But interest will be cumulated in future year when company can sufficiently make a profit. Income bonds are issued in case of reorganisation of companies. What are the main 5 types of bonds?
( 2 ) Deep Discount Bond:- A bond that is selling at a deep discount from the par value. Such deep discount bond are redeemed at the end of 5 years with specified maturity value. Generally, a deep discount bond is sold 20% or more below the face value of bond. That values are prevailing across the market. Such type of bonds have greater risk, as these are usually long term bonds.
These types of bonds are issued by the public financial institutions in India like SIDBI, IDBI and so on. In the 1992 Idbi is the first institute who issued such deep discount bond. Which are redeem by IDBI bank in the year 2017. How many types of bonds are there in finance?
( 3 ) Inflation Linked Bonds:- That bonds are those which provide protection against inflation. It serves to minimise inflation risk. This means their principal value will increased by the change in inflation over a period. First times inflation linked bond are issued by the Massachusetts Bay Company in 1780. However, such bond holder gets an interest payment less than a regular bond. For Example:- If interest rate is 10% and inflation on is 5%, then investors will earn 15% means, investors are protected against inflation.
( 4 ) Option Bonds:- Option bonds are option contracts in which the underlying assets is a bond. A bond option allows investors to hedge the risk of their bond portfolio or speculate on the direction oc bond prices within limited risk. How many types of bonds are there in finance?
Such type of bonds are traded on the OTC traded financial instruments that provides facilities as option to buy or sell a particular bond at a certain date on a particular price. The interest is paid on these bonds at the time of maturity. These types of bonds are issued by IDBI, ICICI etc.
( 5 ) Secured Premium Bonds:- Such bonds can be issued by the listed company after having the approval of Central Government. Such bond has lock period of 4 to 7 years. No interest is paid within the lock period to the SPN holders. Such bond holders will get principal amount along with interest in the installment basis after the lock said period. The fully paid bonds allow the holder to get the equity shares within the specified period. However, in such type of bond provides an option to the holder to sell it back to the issuer company at the par value.
( 6 ) Foreign Currency Convertible Bonds:- These types of bonds are issued in currency other than the domestic currency of the issuing company. The purpose of issuing such bond is to collect funds in the foreign currency. Indian company is also allowed to issuing these FCCB in international securities market to raise funds in ghe foreign currency. Holder of these bonds have an option or authority to convert into equity. It carries fixed rate of interest. How many types of bonds are there in finance?
( 7 ) Floating Rate Bonds:- In such type of bonds interest is not written. The rate of interest of such bonds fluctuate as per the market conditions. As their interest rate fluctuate according to the floating like interest, and bank rate of interest. Government of india first times introduced such type of bonds on 20 September, 1995. How many types of bonds are there in finance?
( 8 ) Convertible Bonds:- Convertible bonds a type of bond that the holder can convert into a shares in a same company to whose they hold bonds. Mostly such type of bonds are issued by company with low credit rating and high growth potential. So these are converted after considered future expectations. The investors prefer to buy bonds rather than equity shares. Because risk in bonds is lower than equity but it is higher than non convertible bonds. How many types of bonds are there in finance?
( 9 ) Foreign Bonds:- When a bonds are issued in a domestic market by a foreign company. Foreign company is issued such bond to raise domestic currency. This will be very interested option for the domestic investors. For foreign company doing a business in the domestic market on the large amount. Example Yankee bonds ( US dollar denominated bond issued by a foreign borrower in the us ) How many types of bonds are there in finance?
( 10 ) Zero Interest Bonds:- Such bond does not pay interest which rendering profit at maturity when the bonds are redeemed at the full face values. These types of bounds don’t carry any coupon rate of interest. A zero interest bound is a bound bought at lower than its face value. These bounds may be issued for long or short term investments. These bounds having maturity dates between 10 to 15 years. These bounds can be held until maturity. Short term zero Interest Bounds have generally maturity less than one year and are called bills. How many types of bonds are there in finance?
Conclusion:- These 10 types of bounds are available across the different market of the world. Which are issed by different company as per their fund raising needs. How many types of bonds are there in finance? What are the 7 types of bonds?
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How many types of bonds are there in finance?
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