“Price is what you pay. Value is what you get”
So guys we are back again with another interesting topic which is What are Bonds and Types of Bonds.
I’m pretty sure that we all have been in a conversation where we’ve heard words thrown around like What are bonds or Types of Bonds. But having next to no idea about it, we just sit there like a dumb person feeling out of conversation. But don’t worry if you haven’t heard about it, we are going to cover the topic from A to Z. So stay tuned and read the article till the end for the complete information.
This article is exclusively dedicated to Bonds. We will learn everything about Bonds and different Types of bonds, why company issues bonds, and I’m pretty sure that at the end of the article you will be able to choose a perfect bond according to your need.
If you are interested in knowing the Meaning and Types of Investment then visit 👉 Meaning of Investment and Types of Investment.
What are Bonds?
Bonds are fixed interest instrument, suitable for the investor who want low risk and fixed return. Returns are usually low because of Low-Risk Low Return formula. They are considered as the safest type of investment because at the time of bankruptcy or windup, company pays to Bondholders after bank loan. Bonds are issued to the general public when a company wants to pay off its debt (debt of higher interest rate) or have plans of expansion. These are the main reasons for issuing bonds.
There are different Types of Bonds –
- Secured Bonds
- Cumulative & Non-Cumulative
- Redeemable & Non-Redeemable
- Registered & Non-Registered
- Fixed & Floating Interest
- Callable & Puttable
- Zero-Coupon & Premium
Types of Bonds
There are different types of bonds, the company issues these bonds according to their need and investors also choose which suits them the most.
Here we have different types of bonds which are listed below –
Secured Bonds as name justify, are the type of bonds that are secured or landed against some security. Secured bonds are only issued when there is collateral security (assets) available against the loan. So at the time of the bankruptcy, it is easy to recover the investor’s money by selling that security. They generally have a lower interest rate as compared to unsecured bonds but it is also a safer option for investment.
Unsecured bonds are the bonds that are issued without any collateral security (assets) against investment. Unsecured Bonds are preferred by the organization which cannot afford to provide any collateral against the money which it is borrowing so they have to pay a higher interest rate as risk increases i.e. it is considered as a good investment option for those who are ready to take higher risk for a higher return.
In Cumulative Bonds, interest is paid at the end of the maturity period along with the principal amount (initial investment) interest will be compounded half-yearly, but it will be credited at the end of the maturity period. This is a good option for those who have a lump-sum amount of money for investment. They can invest some amount in Cumulative Bonds. But here is the catch – You will not get any money from this investment till the maturity period, a good choice for long term investment. Don’t invest in this if you don’t have a deep pocket because your money will be locked and withdrawal will lose your all gains.
In Non Cumulative Bonds, interest is paid half-yearly to investors, and the principal is paid off at the end of the maturity period. Interest will be calculated as simple interest. This can be a good option for the people who want a source of income while they have invested their money as it pays interest every 6 months.
Redeemable bonds are issued for a fixed maturity period of time, after that, you can’t carry them forward. This is a good option for people who have extra money with them and want to invest for a fixed time frame. They can go with this as it provides higher interest rates as compared to a savings account.
Irredeemable bonds are bonds that lack a call feature or a right of redemption, also refers to as a perpetual bond. In an Irredeemable bond, once you invest in a company or organization it will never be redeemed at full value, and till that you are going to enjoy interest on your money. It is a very rigid form of investment. Irredeemable bonds are not allowed in India.
Registered Bonds are issued with the name of the investor on the physical bond. Registered bonds are more secured as changing the name is mandatory at the time of sells and it can’t be transferred without an authorized person’s will and on another hand, it is not that flexible to transfer bonds from one person to another.
Bearer bonds are bonds that do not require to transfer of a name from the seller to buyers. Bearer bonds are easy to transfer from one person to another.
Fixed Interest Bonds
Fixed interest bonds, as the name justify, means that at the time when bonds were issued, both the investor and organization have decided on a fixed percentage of interest which is going to last till maturity. They have fixed interest so can be treated as a constant income source. There is less risk as irrespective of companies profit you are going to be paid.
Floating Interest Bonds
In Floating Interest bonds, the interest keeps fluctuating according to the market conditions. In floater Interest bonds, companies promise to give interest like X% over benchmark interest rate to its investors, LIBOR (London Inter-Bank Offer Rate) is an international benchmark rate and SBI MCLR for India. This interest rate will vary on the market so if you want to take a little risk while playing safe then yes this bond is for you.
Bonds are one of the safest types of investment one can make but with low return and risk. It will definitely provide you higher returns than bank FD’s. There are a lot of Types of Bonds you can choose from according to understanding and need.
So this was all the basic information we wanted to share with you guys on What are Bonds and Types of Bonds.
Now all we want from you is to be a little kind and share our article with people you want to see growing and glowing in all their smart finance managing skills. Just like you 😉