There is a surging interest in bonds as investors look for more stable investment opportunities to park their money. The idea behind investing in bonds is that bondholders avail of a predetermined coupon payment at fixed intervals while guaranteeing capital protection too. The coupon payment is in the form of interest that you can get monthly, quarterly, half-yearly or annually depending on your financial goals.
Both the government and corporates issue bonds to raise money as an effective way to raise capital for their business operations. These bonds are of many types and are classified according to liquidity, coupon value, maturity, credit rating and other factors. With so many bond types to choose from, investors often wonder which of them would help them meet their financial goals. The most common bond types include:
These are the bonds that pay fixed interest rates till the date of maturity of the bond. Therefore, these kinds of bonds suit best those looking for a continued and fixed income source unbiased by the market conditions and earnings of the bond issuer.
An interesting fact about bond investing is that market interest rates are inversely proportional to bond prices. This means that when market interest rates increase, the prices of fixed-rate bonds fall.
Floating rate bonds
These kinds of bonds behave and pay interest in sync with the market, which means that these bonds do not fixed interest rate throughout the period. The interest rates in floating rate bonds vary depending on the benchmark that is set during the tenure. These bonds mostly issued by the government follow the repo rate and reverse repo rate as the benchmarks for deciding the interest rates.
These bonds are typically bought to mitigate the damaging effect of inflation on coupon payments and their face value. The principal amount is adjusted based on the inflation rate and interest is given out on the adjusted principal amount.
These bonds are issued at discount and then paid back to the bondholders at the par value. The bondholders stand to gain from the difference in the yield on the bonds. However, there is no interest payout on these bonds during the entire tenure.
These bonds are similar to buy back of shares and allow the issuer the right to call back the issued bonds at the predetermined date and rates and are preferred by those who wish to benefit from high-coupon payments.
These bonds do not come with a fixed tenure as the bondholders reserve the right to return or redeem them when needed. The bondholders can seek the return of the principal or face of the bond before the maturity date. However, there is a caveat, i.e., these bonds do not offer high-interest rates.
As the name suggests, these bonds are issued for eternity. This means that these bonds come with no maturity date. The interest payout is perpetual, thus, relieving the bond issuers from repaying the principal amount.
Unlike other bonds that either pay interest or repay a higher amount at the time of redemption, these bonds can be converted into stocks of the issuing company. This means that these bonds not only yield interest and redemption of the face value on maturity but can also be converted into the stocks of the issuing organization, thus, allowing investors to avail of the benefits of both debt and equity.