Bond Types

Bonds are essential to the global economy. Here's a short overview into the many different bond types.

Fixed rate bonds

-They have a set coupon rate

-The current value fluctuates with changing interest rates as the bond becomes more/less desirable

-Typically used by governments and corporates

Example: The UK Gilt pays 2% annually

Floating-Rate Notes FRNs

-The coupon rate floats with a reference rate e.g. SOFR + 1.5%

-They're less price sensitive to interest as the coupon rate changes with interest

-They're use by banks and corporates with good credit ratings

-The coupon is typically small

-These are desirable for issuer as it avoids getting locked into high interest rates e.g, rates fall from 5% to 2% and they don’t continue to pay 5%

Zero coupon bonds

-They have a 0% coupon rate (no payments)

-They are sold at a deep discount and then repay at face value at maturity

-The price is determined by discounting the face value up to maturity date (same pinciple as DCF models)

Callable bonds

-The issuer is allowed to repay the bond early (after a pre-determined lock-in period)

-They must pay a premium face value to compensate

-It's typically done to refinance new bonds at a lower rate

Putable bond

-These give investors the right to force issuers to repay the face value early

-It protects them from the bond price falling

-They typically have a lower yield

Convertible bonds

-These can be converted into a fixed number of shares

-They're typically converted by investors if the total share price rises above face value of the bond

-They have a lower coupon rate due to the potential upside

Perpetual bond

-These have no maturity date, investors receive the coupon payments forever

-The issuer doesn’t ever have to repay but may choose to recall bond (so they repay then)

Green/ESG bonds

-These raise money for sustainable/socially responsible projects

Granted this isn't the most exciting piece, it is vital to understand the different bond types to align your investment strategy with what works best for you. For the rest of my work click here!