Bonds are used by issuers to raise money from the capital market. In layman's terms, bonds are essentially instruments of debt created between the lender and the borrower. During certain economic situations, there might be a need for capital generation. As a result, it's normal to see a host of bonds being circulated in the market.
But how do you know which bond is right for you? What factors should you consider before investing in a certain bond? Let’s find out.
Types of Bonds
There are several ways to classify bonds. The most common ones are based on issuer, maturity, interest payment structure, and features. Let’s look at the different bonds under each basis.
Based on Issuer
Treasury Bonds
Treasury bonds are issued by the central bank directly on behalf of the government. For short-term investments, an alternative to treasury bonds can be treasury bills.
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Municipal Bonds
Countries with provincial and local government structures may issue municipal bonds based on the government entity. It works the same way as treasury bonds.
Agency Bonds
Agency bonds are issued by government-affiliated or controlled entities. For example, a government-sponsored enterprise like Biman can issue bonds to raise capital to improve its infrastructure and service.
Investment Grade Bonds
Investment-grade bonds are issued by entities with high credit ratings. Typically the coupon rate for such bonds is low and the investment is more secure.
Junk Bonds
These bonds are issued by companies with low credit ratings and high default probabilities. The returns from these bonds are high whereas the overall investment is less secured.
Supranational Bonds
These types of bonds are issued by international entities like investment banks and the World Bank. The denomination of these bonds is not geographically limited.
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Based on Maturity
Short Term Bonds
Short-term bonds usually have a maturity of less than three years. Treasury bills also fall under the short-term bond structure.
Medium Term Bonds
Medium-term bonds have a maturity period between 4 to 10 years.
Long Term Bonds
Long-term bonds usually have a maturity period of over 10 years. It also includes perpetual bonds.
Read more: How to Buy Bangladesh Government Treasury Bond: Everything You Need to Know
Based on the Interest Payment Structure
Fixed-Rate Bonds
Fixed-rate bonds usually have a fixed coupon rate throughout the maturity period of the bond. For example, the Bangladesh Government Treasury Bond is a fixed-rate bond.
Floating-Rate Bonds
Floating-rate bonds can fluctuate compared to a benchmark rate set at the start of bond sales. Here, the coupon rate varies during the lifetime of the bond.
Zero-Coupon Bonds
These types of bonds do not pay any periodic interest rate. Instead, these bonds are sold at a discount and the investor gets back the face value of the investment upon maturity.
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Based on Features
Convertible Bonds
Bonds that can be transformed into predetermined shares of the borrowing entity.
Callable Bonds
Bonds that can be redeemed by the issuer before it reaches maturity.
Puttable Bonds
Bonds that can be sold by the investor to the issuer at a predetermined price before maturity.
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Perpetual Bonds
Bonds that do not have any maturity date.
Inflation-Adjusted Bonds
Bonds whose coupon rate and the principal are adjusted per the inflation rate.
Sukuk
Bonds issued in line with the Islamic laws.
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