Type of Bonds
Fixed Rate Bonds: These are bonds with the interest rate fixed throughout the entire investment period. The interest rate does not change with the market interest rate.
Callable Bonds: The issuer has the right to redeem the bond at the predetermined redemption price prior to the maturity date. For example, the duration of bond is for a period of five years. The issuer reserves the right to early redemption after 2 years. When the market interest rates drops, the issuer may exercise the rights to redeem to the bond to reduce financial cost. But, it is not a legal obligation for issuer to redeem. When the market interest rate rises, the issuer may not exercise the right to redeem the bond until maturity.
Putable Bonds: The bond holder has the rights to sell back the bond at the predetermined price prior to the maturity date. For example, the duration of bond is 5 years, bond holder can sell the bond back to the issuer at the predetermined price of 100% at year 2. Bond holder should be aware if the issuer had enough financial ability to buy back the bond.
Floating Rate Bonds: The interest rate is reset periodically with predetermined benchmark. Floating Rate bond is linked with interbank interest rates with a spread. In general, the interest rate of the bond will be higher than the interbank rates. Therefore, the interest rate will be floating as interbank rate in order to increase the attractiveness of bonds.
Zero Coupon Bonds: These are bonds that do not pay interests to holders on a regular basis. Holders will generally purchase the bond at a larger discount of the face value bond at the beginning and collect the principal upon maturity.
Convertible Bond: Bond Holder has the rights to convert the bond to the unissued shares of the issuer.
Exchangeable Bond: Bond holder has the rights to exchange the bond with the issued shares of issuer.
Contingent Convertible Bond: On the occurrence of specific trigger event, these types of bond may be written-off completely or partially, loss adsorption and converted to common stocks.