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Types of Bonds - Fixed Rate Bonds, Floating Rate Bonds, Asset-Backed Bonds, Perpetual Bonds, Bearer Bonds 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.
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