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. Characteristics of Bonds Bonds are known as fixed income or fixed interest securities because the interest payments are fixed in advance and paid on a regular schedule. Following are the main characteristics of bonds: 1) A bond is a type of security that gives the holder a financial claim on the issuing company. When you invest in bonds, you are loaning money to the issuer, and you are entitled to receive regular interest payments as well as the full return of your principle at a maturity date. 2) Bonds in general are considered less risky than stocks because they carry the promise of returning the face value of the security to the holder at maturity.

3) Most bonds pay a fixed rate of interest income until they mature. 4) There are many different types of bonds such as government bonds, foreign currency bond, etc. Corporate bonds usually offer higher yields; Government bonds are usually referred to as risk-free bonds; Convertible bond gives the holder the right to convert it into common stocks of the issuer within specified time after issuance. Why Invest in Bonds? Bonds are very similar to bank loan. Investing in bonds means that you are loaning your money to a corporation or government. Bonds are debt, whereas stocks are equity. If you buy stocks, you will become an owner in a corporation. Investors can choose to invest in short, medium or long term bonds. Longer-term bonds (with maturities of 10 years or more) tend to pay higher interest rates because they have greater risk than short-term bonds (with maturities of less than four years). Why invest in bonds? There are many benefits to buying bonds, such as the follows: 1) Investing in bonds is safer than other types of investment like stocks and shares. 2) Bonds have higher and guaranteed rate of return, with fixed interest payments. 3) Most bonds issued by governments (state or local) are exempt from federal income taxes. 4) Bond portfolios can provide stability of principal value. 5) Another advantage is that they are subject to rating systems. A bond rated 'AAA', which is the highest grade, is likely to be repaid on time and in full. 6) Bonds are very liquid and easy to sell. Advantages of Convertible Bond Issue Convertible bonds are company-issued bonds that can be converted into shares at some point in the future. This type of investment can offer many benefits/advantages such as the follows: 1) A convertible bond offers interest, known as a yield, to investors. The longer you hold the bond, the higher your yield rate will be. Such interest is paid to the investor even if the share price does not rise. If the share price on the market goes up, the bond also rises. 2) A convertible bond protects investor from a major loss during the market downturn.

3) Convertible bond gives investors more flexibility. If the company succeeds, you can convert the bonds into stocks that are valued higher than the bond. 4) This type of investment can protect you against market fluctuations, while at the same time providing annual gains. They are less volatile than common stocks. 5) An advantage for the issuing company is that it can offer the bond at a lower coupon rate than it would have to pay on a straight bond. Advantages and Disadvantages of Debentures The Advantages of Debentures are as follows: 1) The holders of the debentures are entitled to a fixed rate of interest. It can be presented as "5% Debenture". 2) Debentures are for those who want a safe and secure income as they are guaranteed payments with high interest rates. 3) They have priority over other unsecured creditors when it comes to debt repayment. The Disadvantages of Debentures are: 1) Unlike ordinary shares, debenture holders are not considered the owners of the company. They are long term loan capital and holders will have no right to vote at the annual general meeting. 2) Debentures are more secure than stocks, but will lead to a lower rate of theoretical return. 3) It is a type of debt instrument which is not secured by collateral (or physical asset). In case of bankruptcy, the bond holders are given priority over the debenture holders. Features of Debentures Debenture is a type of debt instrument issued to anyone who lend money to a company for a specified term and interest rate. In general, debentures have the following important features: 1) Debenture holders are not the owners of the company. They are considered the creditors of the corporation or in other words, the company borrow money from them through issuing debenture. 2) No voting rights. The debenture-holder is not a shareholder and cannot vote in the company's general meetings.

3) Fixed rate of interest. A debenture with a fixed charge has a fixed rate of interest. It can be presented as "10% Debenture". They are always unsecured and earns a fixed rate of interest but has no share of the profit. 4) Compulsory payment of interest. The interest on debenture is payable irrespective of whether there are profits made or not. 5) Redeemable and Irredeemable. A redeemable debenture is the one which is to be repaid within a maturity period, while Irredeemable or Non-redeemable debentures cannot be redeemed in the life time of the company and only repayable upon the liquidation of the corporation.