Bonds and Debentures
Let’s learn more about bonds and debentures.
Bonds: A bond is an instrument of indebtedness of the bond issuer to the holders. It is a debt security, under which the issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay them interest (the coupon) or to repay the principal at a later date, termed the maturity. Interest is usually payable at fixed intervals (semiannual, annual and sometimes monthly). Very often the bond is negotiable, i.e. the ownership of the instrument can be transferred in the secondary market.
Types of Bonds
- Fixed-rate bonds: The interest rate remains constant throughout the life of the bond.
- Floating rate bond: It has a variable interest rate that is tied to a benchmark such as a money market index.
- Zero-coup bond: They do not bear interest, but are sold at a substantial discount from their par value.
- Inflation indexed bonds: Under these types of bonds the principle is indexed to inflation.
- Securitized bond: Under this category interest and principal payments are backed by an underlying cash flow from another asset.
- Sovereign Bonds: In deposit terminology, the term Sovereign Bond refers to a debt instrument bearing interest and issued by a country. As with all bonds, a Sovereign Bond generally promises to pay a certain amount on a certain date, as well as period interest payments generally termed coupons.
- Corporate Bonds: A corporate bond is a bond issue by a corporation. It is a bond that a corporation issues to raise money effectively in order to expand its business. The term is usually applied to longer-term debt instruments, generally with a maturity date falling at least a year after their issue date.
- Gilts: Gilt-edged securities are bonds issued by certain national governments.
- Subordinated bond: subordinated debt is debt which ranks after other debts should a company fall into liquidation or bankruptcy.
- High-yield bonds: A high-yield bond (non-investment-grade bond, speculative-grade bond, or junk bond) is a bond that is rated below investment grade. These bonds have a higher risk of default or other adverse credit events, but typically pay higher yields than better quality bonds in order to make them attractive to investors.
- Fully Convertible Debentures/bonds: A type of debt security where the whole value of the debenture is convertible into equity shares at the issuer’s notice. The ratio of conversion is decided by the issuer when the debenture is issued. Upon conversion, the investors enjoy the same status as ordinary shareholders of the company.
- Partly Convertible Debentures/Bonds: Debentures where a portion of the face value is converted into equity shares and non-convertible part is redeemed on maturity. In this case, the binds are partly converted into a fixed number of shares if the issuing company and the remaining portion are redeemed in the form of money paid on maturity.
- Non-Convertible Debentures/Bonds: These bonds are non-convertible and on maturity the entire proceeds are paid out in the form of money.
