Question

Describe four innovative bond types, and explain why were they created and how these bonds works?

Answer 1

A. Floating Rate Bond- Floating rate bond is a type of Bond which is issued with floating interest rate and they do not have the risk of fixed interest rate and this will be protecting the companies to a large extent against fixed payment of interest rate even though interest rate is lower so it will offer the company with the flexibility and there is a minimum floor payment which has been fixed and minimum rate of payments will be paid to the shareholder.it was created to protect against fixed charge.

B. Bond with call option /callable bonds= callable bonds are all those bonds which will provide the company with a call option and the company can call the bond when they will feel that the interest rate in the market is lower and they will be reissuing their bonds and there will be a optimum flexibility in the hand of bondholder in case the interest is going lower so that they can lower their overall liability.it will offer the company with an advantage with lower interest rate so it was created.

C. Convertible bonds- convertible bonds are those bonds which can be converted into shares of the company after a certain period of time so it will be providing an option to the the bond holder of the company to become the shareholder in a company by paying a lower amount than the actual prices and it will offer them with a chance of being the equity shareholders of the company.this was invented for those people who wanted to be shareholder in the long term but feared the sustainability of company.

D. Zero coupon bonds- zero coupon bonds are those bonds which will not be paying any kind of coupon on their Bond and they will only be paying the entire amount at the maturity so they will be having a very high risk of interest rate change and zero coupon Bond will always be issued at our discount so that investor will have a benefit of redemption at the face value. This bond were created to fund the short term requirement of money with the long term debt capital.