Bonds Debt

By: EconomyWatch Content   Date: 28 October 2009

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Bonds or bonds debt are debt instruments that bear interest upon maturity. Simply put, corporations raise money from the public by issuing debt securities such as bonds with a fixed maturity period at a specific rate of interest, which is called a coupon rate.

Normally, the maturity period of bonds can range from one year to 30 years. You can buy corporate bonds from a brokerage firm at the offering price or from the secondary market at prices lower or higher than par. Many individual investors purchase corporate bonds through mutual funds.

Bonds Debt - Types of Bonds

Corporate bonds can be classified based upon maturity period and coupon rates. They are:

Zero Coupon Bonds: When the bonds are issued at a discount to the face value and repaid based upon the face values, they are called Zero Coupon bonds. There are no cash flows with zero coupon bonds as there is no interest to be paid. Therefore, the difference between the discounted price and the redeemable price itself reflects the income to the bond holders. With zero coupon bonds, the longer the maturity period is, the lesser will be the issue price. These bonds are also called Deep Discount Bonds.  

Floating Rate Bonds: In terms of floating rate bonds, the interest or the coupon rate fluctuates based on the benchmark rate. They are also called as:

  • Range Notes

  • variable rate bonds or

  • adjustable rate bonds

If the coupon rate moves opposite to the benchmark rate, it is called as inverse floaters.

 

A callable bond: This lets an investor redeem the bond before the maturity period. A corporation can use this call option when the company does not want the investments any more. Moreover, a company can execute the call option when the interest rate changes to its favor. Companies do this to reduce the cost of debts.

Puttable Bonds: In the case of puttable bonds, the bond holder has the right to redemption before the maturity period. The bond holder can opt for full or partial redemption. Bond holders do this to jump from low coupon rate bonds to higher coupon rate bonds.

Risk-averse investors invest in bonds as it has less risk. However, investing in corporate bonds is not risk free. The price of bonds can go up or down based on changes in the interest rates and macroeconomic conditions.


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