Question

Briefly explain any three common classifications of bonds available in market.

Answer 1

A Bond is a debt instruments which has a fixed interest bearing, and the interest is paid as per the bonds issuing policy, semi-annually or annually.It can be termed as a loan given by investors to the bond issuing authority i.e governments , coporates etc. Bonds are issued for the financig of large projects, operations, expanding the product lines etc.The owner of the bonds are the debtholders or creditors, and has a maturity value at the end of the expiration of bonds

There are various variety of bonds like Zero Coupon Bonds- This are the non regular paying bonds which are issued at less value but matured at higher value on the expiry which consist of the interest part. Convertible bonds- This bonds are issued having an option of converting it into the equity share and get a ownership in the company , it happens mainly in coporate bonds etc.

Classification of Bonds available in the market: Based on the issuing authority common classifications of bonds which are available as follows:

1. Government Bonds/ Treasury Bonds:

This bonds are issued by the government .This Bonds able to be traded in the market and are highly liquid having a maturity range from 30 days to 30 years This bonds carry an advantage in US market as interest are generally exempt from state and local taxes. This bonds have highest trustworthiness as issued by the governmental authority. This bonds pay the periodic interest and are matured at the maturity value and preferred by the conservative investors who wants risk less income.

2. Corporate Bonds:

This bonds are issued by the corporations for the public at large to fund a large capital investment or a business expansion. This bonds generally has a higher level of risk than government bonds, but as it is known high risk has a potential of higher income ,hence the it has higher potential yield, however it depends on the company issuing the bonds,One of the speciality of corporate bonds are this bonds can also be convertible bonds which are convertible in equity.

3. Municipal Bonds:

This bonds are issued by states and municipalities or local governments they issue bonds to raise cash to fund various public projects like  construction of schools, highways, sewer systems etc.This bonds have a higher interest rates but are little less secure than the government bonds/Treasury as the local government has a risk of bankruptcy. Some of municipal bonds are exempt from taxes of state and local taxes.This can be general obligation bonds and Revenue bonds , the general bonds are based on credibility of the issuer whereas the revenue bonds are backed by the project it is taken for.