BOND

A bond is a debt security in which the authorized issuer owes the holders a debt & depending on the terms of the bond, is obliged to pay interest to use and to repay the principal at a later date , termerd maturity. A bond is a formal contract to repay borrowed money with interest at fixed intervals.

TYPES OF BONDS
FIXED RATE BONDS Fixed rate bonds have a cupon that remains constant throughout the life of the bond. FLOATING RATE NOTES(FRNs) FRNs have a variable cupon that is linked to a reference rate of the interest ,such as LIBOR or Euribor.e.g. the cupon may be defined as three Month USD LIBOR+0.20%. The cupon rate is recalculated periodically,typically every one or three months. ZERO-COUPON BONDS These bonds pay no regular interest. These are issued at substantial discount to par value , so that the interest is effectively rolled up to maturity.The bondholder receives the full principal amount on the redemption date. An example of zero coupon bonds is series E savings bonds issued by the U.S. governmment .Zero cupon bonds may be created from fixed rate bonds by a

financial institutions separating the cupons from the principal. INFLATION LINKED BONDS These are the bonds in which the principal amount & the interest payments are indexed to inflation. The interest rate is normally lower than for fixed rate bonds with a comparable maturity. However, as the principal amount grows ,the payment increase with inflation. Treasury inflation protected securities are the example of the inflation-linked bonds issued by the U.S. government. ASSETS BACKED SECURITIES These are the bonds whose interest & principal payments are backed by underlying cash flows from other assets.Examples of assets backed securities are mortgage backed securities ,collateralized mortgage obligations ,and collateralized debt obligations. SUBORDINATED BONDS These bonds have a lower priority than other bonds of the issuer in case of liquidation. In case of bankruptcy, there is a hierarchy of creditors. First the liquidator is paid, then government taxes ,etc. The first bond holders in line to be paid are those holding what is called senior bonds. After they have been paid , the sub ordinated bond holders are paid. As a result , the risk is higher. Therefore subordinated bonds usually have a lower credit rating than senior bonds. The main examples of subordinated bonds can be found in bonds issued by banks & assets backed securities.

 PERPETUAL BONDS These bonds are also often called perpetuties or preps. They have no maturity date. The most Famous of these are U.K consols which are also Known as Treasury Annuities or undated treauries. BEARER BOND This is an offical certificate issued without a named holder. In other words the person who has the paper certificate can claim the value of the bond. Often they are registered by a number to prevent counterfeiting but may be traded like cash. Bearer bonds are very risky because they can be lost or stolen. REGISTERED BOND This is a bond whose ownership is recorded by the issuer or by transfer agent. It is the alternative to a bearer bond. TREASURY BOND This is also called government bond and is issued by the federal government & is not exposed to default risk. It is characterized as the safest bond with the lowest Interest rate. A treasury bond is backed by the full faith & credit of the federal government. For that reason, this type of bond is often referred to as riskfree. MUNICIPAL BOND This is a bond by a state, U.S. Territory, city, local govt. or their agencies. Interest income received by holders of muncipal bonds is often exempt from the federal income tax of the state in which they are issued,

although municipal bonds issued for certain purposes may not be tax exempt. BUILD AMERICA BONDS This is a new form of municipal bond authorized by the American Recovery & Reinvestment Act of 2009. Unlike traditional municipal bonds, which are usually tax exempt interest received on BABs is subject to federal taxation. However as with municipal bonds, the bond is tax-exempt within the state it is issued. If offers higher yeilds(over 7%) than standard muncipal bonds. BOOK ENTRY BOND That bonds doesnot have a paper certificate. As physically processing paper bonds & interest cupons became more expensive, issuers have tried to discourage their use. LOTTERY BOND These are the bonds issued by a state, usually a european state. Interest is paid like a traditional fixed rate bond, but the issuer will redeem randomly selected individual bonds within the issue accorrding to a schedule. Some of these redemptions will be for a higher value than the face value of the bond. WAR BOND This is a bond issued by a country to fund a war. SERIAL BOND This bond matures in installments over a period of time. REVENUE BOND This is a special type of muncipal bond distinguished by

its guarantee of repayment solely from revenues generated by a specified revenue-generating entity associated with the purpose of the bonds. Revenue bonds are typically non-recourse meaning that in event of default, the bond holder has no recourse to other governmental assets or revenues. CLIMATE BOND A bond issued by a govt. or corporate entity in order to raise finance for climate change mitigation or adaption related projects or program. EURO BOND A bond issued by an international borrower and sold to investors in countries with currencies other than the currency in which the bond is denominated. FOREIGN BOND A bond issued in a host countrys financial market in the host countrys currency by a foreign borrower. JUNK BONDS Debt rated Ba or lower by moodys or BB or lower by standard & poors. Commonly used during the 1980s by rapidly growing firms to obtain growth capital, most often as a way to finance mergers and takeovers.Highrisk bonds with high yields often yielding 2% to 3% more than the best-quality corporate debt. PUTABLE BONDS Bonds that can be redeemed at par(typically,$1000) at the option of their holder either at specific dates after the date of issue and every 1 to 5 years thereafter or when and if the firm takes specified actions, such as

being acquired, acquiring another company, or issuing a large amount of additional debt.In return for its conferring the right toput the bond at specified times or when the firm takes certain actions, the bonds yeild is lower than that of a non-putable bond. COLLATERAL TRUST BONDS Secured by stock and bonds that are owned by the issuer. Collateral value is generally 25% to 35% greater than bond value. MORTGAGE BONDS Secured by real estate or buildings. DEBENTURES Unsecured bonds that only creditworthy firms can issue. Convertible bonds are normally debentures. INCOME BONDS Payments of interest is required only when earnings are available.Commonly issued in reorganization of a failing firm.