FINANCIAL BASICS: TYPES OF BONDS
There are many different types of bonds that are designed to meet the varying needs of investors. Let's take a look at some of them:
Government or sovereign bonds are issued by national governments to the public when the government needs to borrow funds for its expenditure or pay down debt.
Corporate bonds are bonds issued by corporations to raise money for expansion or growth.
Convertible bonds are bonds that can be exchanged into shares of the issuing company.
Foreign currency bonds or Forex bonds are bonds issued by financial institutions, companies, or governments in foreign currencies, as foreign currencies may be more stable than their domestic currency.
A zero coupon bond, also called a discount bond, does not pay any interest, but trades at a discount to the par value, earning the owner a profit on maturity, when the full face value is returned.
Junk bonds are bonds that have very high yields as they are below investment grade, i.e. very risky, and investors need to be compensated for that risk.
Floating rate bonds are bonds that have variable coupon payments, which are pegged to money market reference or benchmark rates plus a spread.
Asset-backed bonds are bonds backed by underlying cash flows from other assets such as auto loans, credit card receivables, home equity loans, etc.