Different Types of Bonds

A bond is a debt security that is run by the government or an agency.

Following are some of the main types of bonds:

1) Corporate Bonds - These are issued by large corporations and have higher yields because there is a higher risk of a company defaulting as compared to government bonds.

2) Government Bonds - These are the bonds issued by government in its own currency. They are usually referred to as risk-free bonds. Bonds issued by national governments in foreign currencies are referred to as sovereign bonds.

3) Zero-Coupon Bonds - This is a type of bond that does not pay interest and sold at a lower than par value. For example, a zero-coupon bond with a $10,000 par value and 20 years to maturity is trading at $2,000; you will be paying $2,000 today for a bond that will be worth $10,000 in 20 years.

4) Junk Bonds - Also known as a "high-yield bonds", they are rated lower because of high default risk.

5) Convertible Bond - This gives the holder the right to convert it into common shares of the issuer at some fixed ratio in a particular date. They have a coupon payment.

6) Inflation-indexed (or inflation-linked) Bond - It provides protection against inflation, and is designed to cut out the inflation risk of an investment.

7) Foreign Currency Bond - This is issued by an issuer in a currency other than its national currency.

8) Extendible and Retractable Bonds - They have more than one maturity date. Extendable bonds allow the holder to extend its initial maturity at a specific date or dates.

* Next: Characteristics of Bonds