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Types of bonds
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Convertible bonds or convertible debentures are those that can be converted into some other kind of securities, usually common stock in the corporation that issued the bonds.
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Fixed-rate bonds, where the interest rate remains constant throughout the life of the bond.
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Floating-rate bonds, with a variable interest rate that is tied to a benchmark such as a money market index. The "coupon" is then periodically reset, normally every three or six months.
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High-yield bonds are bonds that yield more than investment grade bonds. The usual reason a company has to pay more interest on their debt is that the company has poor credit rating, which means it is considered a high risk investment. Bonds with a poor credit rating are sometimes known as junk bonds. Junk bonds of companies that previously had higher credit ratings are sometimes known as fallen angels. Other companies have lower credit ratings because they are relatively unknown and haven't established enough of a track record to qualify for lower interest loans. Equity techniques are often used for the analysis of high-yield bonds, as they tend to share more characteristics than investment grade bonds. Different credit analysis techniques, such as researching the covenants of the bonds, are also considered much more important than with investment grade bonds.
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Zero-coupon bonds, which do not bear interest, as such, but are sold at a substantial discount from their par value. The bondholder receives the full face value at maturity, and the "spread" between the issue price and redemption price is the bond's yield. (Series E savings bonds from the U.S. government are zero-coupon bonds.) Zero-coupon bonds may be created from normal bonds by finance institutions "stripping" the coupons (the interest part of the bond) from them - that is, they separate the coupons from the principal part of the bond and sell them independently from each other.
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Inflation-indexed bonds, in which the principal (or "face" value) is indexed to inflation, which causes higher interest payments (interest is calculated as the coupon rate multiplied by the principal amount). TIPS (Treasury Inflation-Protected Securities) and I-bonds are examples of inflation indexed bonds issued by the U.S. government.
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Securitized bonds whose interest and principal payments are backed by an underlying cash flow from another asset. For example, if a credit card company needs immediate cash to lend to credit card holders, they can issue a bond that is backed by the credit card payments. Another large market of securitized bonds are mortgage backed debt.
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Subordinated bonds are those that have a lower priority than other debts of the issuing corporation, so if there is not enough money to pay all the company's debts, the "senior" (higher-priority) bonds are paid first, and the subordinate bonds are paid out of what money, if any, is left. These priority levels are called 'tranches', and many bonds have more than two. In some cases, the tranches don't determine whether a bond holder will be paid, but rather how fast they will be paid. For example, if the bond is a mortgage, the senior tranche might receive any funds that are prepaid by the debtor.
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Perpetual bonds are also often called annuities. The most famous of these are the UK Consols, which are also known as Treasury Annuities or Undated Treasuries. They have no maturity date and still trade today despite, for example, dating to 1888 for the specific Consols known as the Treasury 2.5% Annuities. The concept of perpetual bonds also serves a useful purpose in that it represents an extreme case of a bond having only a cash flow and no re-payment of principal, being the theoretical opposite in many ways of a Zero-coupon bond which has no cash flow during the life of a bond and has only a re-payment of principal against a purchase price at a discounted par value. Perpetual bond concepts thus serve an extremely useful purpose, along with Zero-coupon bond concepts, for estimating the volatility of many other bond types having characteristics falling between the extremes of perpetual bonds and Zero-coupon bonds under conditions of variable yields, variable maturity dates, and variable basis point shifts that may occur during the life of a bond.
By issuer
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Government bonds ("sovereign bonds"), are issued by national governments.
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- Germany. Bunds are bonds issued by the German government.
- United Kingdom. Gilts are bonds issued by the government of the United Kingdom in sterling.
- Municipal bonds are issued by local governments in the US.
Tags:
Bonds, Money
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