Every bond selling on the public
market has some covenants and specifications to it that
make it different from other bonds. However, we have classified
many of the bonds into the following categories:
1) Fixed Rate Bonds
Fixed rate bonds
are what the name implies, they provide a fixed coupon
interest payment at each period (monthly, quarterly, semi-annually
or annually) for a certain # of years up until maturity.
Upon maturity, fixed rate bonds pay back the entire original
principal amount. Go here to learn more about bond
debt securities.
2) Floating Rate Notes
Floating Rate Notes are different
than fixed rate notes because they pay out variable coupon
interest payments at each period (monthly, quarterly,
semi-annually or annually). The amount of these variable
payments are determined by the current market interest
rates such as the LIBOR (London Interbank Offered Rate)
or Federal Funds Rate (FFR) + a "spread." A
spread is a percentage point example 0.2 that remains
constant.
3) High Yield Bonds
High yield bonds are bonds that pay
out higher coupons than normal, however they have a large
chance of defaulting on these coupon payments. They are
therefore graded below the "investment grade."
These types of bonds are also known as junk bonds.
4) Zero Coupon Bonds
Zero coupon bonds do not pay out
any coupon interest payments but they are sold for very
cheap. For example, if you buy a $1000 face value bond
today for $450 (discounted bond value), the company might
pay you back $1000 in 5 years. You have therefore made:
$1000 - $450 = 550 / 5 years = $110 per year.
Zero coupon bond maturity dates can
range from long term (10 - 15 years) and short term (less
than 1 year).
5) Asset Backed Bonds
Asset backed bonds are bonds available
on the debt market that are backed up by a diverse pool
of illiquid assets such as accounts receivable collections,
credit card debt or mortgages and are relatively safe
investments. If an issuing company defaults on its bond
debt repayments, bondholders can then legally be entitled
to cash flows generated from these illiquid pool of assets
(A/R, mortgages, credit card debt, etc).
6) Subordinated Bonds
Subordinated bonds are those that
have a lower priority when compared to other creditors
and bondholders incase of bankruptcy and liquidation.
If the issuing corporation goes bankrupt, the creditors
are paid first. After that, government taxes are paid.
After that, the senior bond holders are paid followed
by the subordinated bondholders. As you can make out from
this, subordinated bonds carry a very high risk of non-payment
because they are the last in the hierarcy of creditors.
7) Perpetual Bonds
Perpetual bonds are also known as
perpetuities because they have no date when they become
matured. This means the coupon interest payments are paid
forever. Examples of perpetual bonds are "Consols"
issued by the British Government in 1888, which still
trade in the market today. They are also called Undated
Treasuries or Treasury Annuities.
Recently, Weat Shore Railroad issued
a bond that matures in the year 2361 (which matures in
355 years). This kind of a bond is also known as a perpetuity.
8) Bearer Bond
Bearer bonds are legal certificates
that entitles the bondholder to receive coupon interest
payments and the entire original principle upon maturity.
However, they are different in the sense that no record
of the original bondholder is kept. Whoever has the bond
physically must present it for reimbursement during certain
bond payment dates and will receive the coupon payments.
Therefore if you owned a bearer bond
but lost the physical certificate, there is no record
of you with the issuing corporation. In simple terms,
if you lose the bearer bond certificate, consider it as
a lost investment!
Why would anyone buy a bearer bond?
Some investors like to keep anonymity and prefer bearer
bonds because there is no record of them with the issuing
corporation.
