What are the types of bonds to invest in? Straight Bonds are issued with a fixed interest rate, redeemed in a certain traditional mode. But these are not the only type of bonds. The process of improving bonds on the capital markets still continues. Also the markets themselves are subject to evolution by introducing new financial instruments (innovation or even financial inventions). This also applies, as mentioned, to the bonds. All this happens in order to increase the attractiveness of bonds for capital market participants – both investors and issuers. Sometimes the bond is so transformed that its new form is put, due to its financial characteristics, between action and bond.
Floating Rate Bonds (FRN)
Floating rate bonds are a relatively new type of security to invest in. They represent a medium-and long-term loan. Fixed interest rate is not fixed, while the interest rate rule is. It is a variable interest rate. It is reviewed every few months, usually every 3 or 6 (interest periods). The basis of the type of FRN bond is the interest rate at which banks offer each other loans in the interbank market. The interest rate on the bonds is higher than the rate of interbank and vary depending on the changes. The interest rate on the interbank money market is called Libor.Libor – The London Interbank Offered Rate – the interest rate at which London banks grant themselves the short-term loans. There are several basic interest rates of Libor type. The main concern investments for 3 – and 6 -months. Same in the case of FIBOR – Frankfurt Interbank Offered Rate in Germany. There are many other such interest rates, such as Hibor (Hong Kong ).
Determined variable FRN interest on the bonds is as follows: variable rate of Libor + margin = variable interest rate bonds of FRN, such as L + 0.375. Added to the Libor rate margin is the price of risk posed by security. The greater the risk, the greater the margin. Prime borrowers are able to get a low margin, eg 1/8 %. Some advantages of FRN bonds is better protection from the effects of inflation, than it’s in case of straight bond. Often, FRN type bonds have guaranteed minimum rate of interest. This rate remains unchanged in case the Libor rate with a margin fell below that rate. This is an additional FRN advantage for the investor.
Dual Currency Bonds are bonds denominated in one currency (such as the Canadian dollar) and are redeemed at maturity in another currency (eg U.S. dollars). Unpaid interest on bonds are payable in one or the other currency. Redemption of bonds takes place in a currency other than that in which it is denominated. The exchange rate is fixed in advance (eg how much for CAD per USD). If so, it is because the exchange rate is fixed and determined in advance (actually means the rate of the Canadian dollar to the U.S. dollar), while exchange rates are variable and different. Therefore, the dual currency notes are often treated as speculative.
Convertible Bonds (Convertobles)
Such bond entitles its holder to exchange the bond for shares owned. Exchange terms are defined. These relate to the time period in which you can make the conversion and the exchange rate, i.e. in what relation bond is exchanged for shares. The number of shares that can be obtained for a bond is the rate of conversion – conversion rate. This rate may vary depending on the orbital period of the bonds. For example, for the bond after five years from its issue, you can receive 20 shares, and after eight years 30 shares.
Bonds with Warrants (Bonds with rights of issue of shares). These bonds are a form akin to convertible bonds. The main difference is that the fact of having them is not entitled to exchange them for shares, but shall entitle to purchase shares. Terms of repurchase are fixed. These relate to the share price. It is worth noting that these warrants – pre-emptive rights associated bonds may be traded separately from the same bonds. Pre-emptive rights can be used or you can sell them or let them expire.
Indexed Bonds. These are another type of bonds for investment, which bear interest or its rate of redemption is variable in relation to a specified rate. Such a point of reference or an indicator may be the price of electricity, gold or silver.
Zero Bonds (Zero-coupon bonds). It is one of the types of bonds that do not have interest coupons. Capitalized interest for the entire running period of bond purchaser receives at maturity (redemption, repurchase) of bonds. The construction of a typical zero bonds is as follows: redemption of bonds takes place according to its nominal value. Thus, the initial issue price (selling) bonds are: the nominal value of bonds minus capitalized interest for the entire period of the bond’s period. In other words, the acquisition of bonds takes place with a large discount to its face value.
Other common specific types of bonds to invest in are:
Participating bonds – bonds of this type have a fixed nominal rate of interest, in addition to entitle the owner to share the profits of the issuer. It is a value that can be called “accretion” of stocks and bonds together. Admission of holder of such bonds to share the profits is to increase the attractiveness of bonds.
Income bonds – bonds without warranty of interest. The mechanism of action of this asset is that interest is paid if the issuer achieves gains. If it doesn’t reach it, the interest rate will be zero. Certainly this is a very lame type of bond.
Partly paid Bonds (bonds partially paid). The purchaser of such bonds at the time of purchase pays only a portion of the nominal value of the bonds. The rest of the charges shall be paid within a few months.
The above list contains the most common types of bonds for investing right now.