A bond is a form of debt security wherein the issuer is obliged to pay the holder the principal amount plus the interest accrued over a stipulated period. Investing in bonds is a long-term game. A bond normally matures from 10-20 years after its issue. The following article acts as a guide on the different types of bonds available in the debt market.
Types of bond based on issuer
There are two different types of bonds based on the issuer :
The government bonds and the corporate bonds. Government bonds Government bonds are issued by the national government and/or the local government to finance the public expenditure, such as public works and construction of government offices. Basically, governments bonds are evidence of indebtedness issued by the debtor government to its people and other willing investors.
Corporate bonds On the other hand, corporate bonds are issued by companies and business firms either for specific or general purposes. Corporate bonds are usually undertakings between several debtor, creditor and guarantor companies and individuals. Corporate bonds are more active in bonds trading compared to government bonds.
Types of bonds based on security
Bonds can be divided into two groups, based on security:
- The secured or collateral bonds
- The debenture or high-risk, high-yield bonds Secured or collateral bonds Secured or collateral bonds are issued with collateral. Collateral can take the form of plant, property and equipment, sinking fund (in case of a sinking bond) other financial and marketable securities held by the issuing company. Debenture bond Unsecured bonds known as debenture bonds are not guaranteed. Investors of debenture bonds are considered general creditors, and are the least prioritised in the event of bankruptcy.
Other types of bonds
Apart from the types of bonds based on the issuer and based on the security, there are several other types of general bonds. Some of these bonds include convertible bonds, redeemable or callable bonds and coupon bonds. Convertible bonds Convertible bonds are evidences of indebtedness that can be converted into other types of financial securities held by the issuing company. Convertible bonds can be exchanged for stocks, mutual funds and trading securities held by the issuing company. Redeemable or callable bonds Redeemable or callable bonds are bonds that can be redeemed by the issuing company, even before maturity date, under certain economic conditions. Coupon bonds Coupon bonds are bonds that come with attached coupons that represent interest payments. Coupon bonds are sometimes called "bearer bond."