Bonds

What are Bonds?

A bond is a type of debt instrument that is issued to raise capital by businesses, municipalities, and governments. The agreement between the lender and the shareholder is formalized in a bond. When you buy a bond, you are effectively lending money to the issuers in exchange for regular interest payments and the repayment of the principal when the bond matures.

Bonds are considered to be less risky investments than stocks, but they typically provide lower returns. Shares carry more risks but the probability of getting a return is also high. Bonds are generally considered to be a good investment for individuals who are for a steady, predictable income stream and are willing to take on a moderate level of risk.

Most companies and government issues bonds and investors buy those bonds as a saving and security option.

Types of Bonds

A bond is a fixed-income instrument that represents an investor's loan to a borrower. There are various types of bonds -

Government Bonds

Government Bonds are bonds issued by a government at a fixed rate of interest. National governments or their agencies issue these bonds. Treasury bills, municipal bonds, zero-coupon bonds, and so on. These are considered among the safest investments because they have very low default risk, but they also tend to have lower yields when compared to other types of bonds.

Traditional Bond

A Traditional Bond is one in which the entire principal can be withdrawn at once after the maturity date has passed.

Callable Bond

Callable bonds are those in which the bond's issuer asserts his right to redeem the bond before it matures.

Fixed-Rate Bonds

A fixed-rate bond is one in which the coupon rate remains constant throughout the investment.

Floating Rate Bonds

The interest rate on these bonds fluctuates based on a reference rate, as the name implies. These are less sensitive to changes in interest rates, making them a good choice for investors concerned about rising rates.

Puttable Bond

A Puttable bond is one that allows an investor to sell their bond and receive their money back before the maturity date.

Mortgage Bond

Mortgage bonds are bonds that are secured by real estate and equipment.

Zero-Coupon Bond

Bonds are called zero-coupon bonds when the coupon rate is zero and the issuer is only required to repay the principal amount to the investor.

Serial Bond

A Serial Bond is one in which the issuer repays the loan amount to the investor in small installments each year to reduce the total debt.

Extendable Bonds

Extendable bonds allow the investor to extend the maturity date of the bond.

Climate Bonds

Climate Bonds are issued by any government to raise funds when the country's climatic conditions deteriorate.