Types Of Bonds

Corporate Bonds
A company can issue bonds just as it can issue stock. Large corporations have a lot
of flexibility as to how much debt they can issue: the limit is whatever the market
will bear. Generally, a short-term corporate bond has a maturity of less than five
years, intermediate is five to 12 years and long term is more than 12 years.
Corporate bonds are characterized by higher yields because there is a higher risk of
a company defaulting than a government. The upside is that they can also be the
most rewarding fixed-income investments because of the risk the investor must
take on. The company's credit quality is very important: the higher the quality, the
lower the interest rate the investor receives.
Variations on corporate bonds include convertible bonds, which the holder can
convert into stock, and callable bonds, which allow the company to redeem an issue
prior to maturity.
Convertible Bonds
A convertible bond may be redeemed for a predetermined amount of the company's
equity at certain times during its life, usually at the discretion of the bondholder.
Convertibles are sometimes called "CVs."
Issuing convertible bonds is one way for a company to minimize negative investor
interpretation of its corporate actions. For example, if an already public company
chooses to issue stock, the market usually interprets this as a sign that the
company's share price is somewhat overvalued. To avoid this negative impression,
the company may choose to issue convertible bonds, which bondholders will likely
convert to equity should the company continue to do well.
From the investor's perspective, a convertible bond has a value-added component
built into it: it is essentially a bond with a stock option hidden inside. Thus, it tends
to offer a lower rate of return in exchange for the value of the option to trade the
bond into stock.
Callable Bonds
Callable bonds, also known as "redeemable bonds," can be redeemed by the issuer
prior to maturity. Usually a premium is paid to the bond owner when the bond is
called.
The main cause of a call is a decline in interest rates. If interest rates have declined
since a company first issued the bonds, it will likely want to refinance this debt at a
lower rate. In this case, the company will call its current bonds and reissue new,
lower-interest bonds to save money.
Term Bonds
Term bonds are bonds from the same issue that share the same maturity dates.
Term bonds that have a call feature can be redeemed at an earlier date than the
other issued bonds. A call feature, or call provision, is an agreement that bond
issuers make with buyers. This agreement is called an "indenture," which is the
schedule and the price of redemptions, plus the maturity dates.
Some corporate and municipal bonds are examples of term bonds that have 10-year
call features. This means the issuer of the bond can redeem it at a predetermined
price at specific times before the bond matures.

A term bond is the opposite of a serial bond, which has various maturity schedules
at regular intervals until the issue is retired.

Amortized Bonds
An amortized bond is a financial certificate that has been reduced in value for
records on accounting statements. An amortized bond is treated as an asset, with
the discount amount being amortized to interest expense over the life of the bond.
If a bond is issued at a discount - that is, offered for sale below its par (face value) the discount must either be treated as an expense or amortized as an asset.
As we discussed in Section 4, amortization is an accounting method that gradually
and systematically reduces the cost value of a limited life, intangible asset. Treating
a bond as an amortized asset is an accounting method in the handling of bonds.
Amortizing allows bond issuers to treat the bond discount as an asset until the
bond's maturity. (To learn more about bond premium amortization, read Premium
Bonds: Problems And Opportunities.)
Adjustment Bonds
Issued by a corporation during a restructuring phase, an adjustment bond is given
to the bondholders of an outstanding bond issue prior to the restructuring. The debt
obligation is consolidated and transferred from the outstanding bond issue to the
adjustment bond. This process is effectively a recapitalization of the company's
outstanding debt obligations, which is accomplished by adjusting the terms (such as
interest rates and lengths to maturity) to increase the likelihood that the company
will be able to meet its obligations.
If a company is near bankruptcy and requires protection from creditors (Chapter
11), it is likely unable to make payments on its debt obligations. If this is the case,
the company will be liquidated, and the company's value will be spread among its
creditors. However, creditors will generally only receive a fraction of their original
loans to the company. Creditors and the company will work together to recapitalize
debt obligations so that the company is able to meet its obligations and continue
operations, thus increasing the value that creditors will receive.
Junk Bonds
A junk bond, also known as a "high-yield bond" or "speculative bond," is a bond
rated "BB" or lower because of its high default risk. Junk bonds typically offer
interest rates three to four percentage points higher than safer government issues.
Angel Bonds
Angel bonds are investment-grade bonds that pay a lower interest rate because of
the issuing company's high credit rating. Angel bonds are the opposite of fallen
angels, which are bonds that have been given a "junk" rating and are therefore
much more risky.
An investment-grade bond is rated at minimum "BBB" by S&P and Fitch, and "Baa"
by Moody's. If the company's ability to pay back the bond's principal is reduced, the
bond rating may fall below investment-grade minimums and become a fallen angel.

Technically, bonds refer to debt instruments with maturities of 1o years or more.

Most people, however, use the term bonds loosely to refer to almost any debt
instrument regardless of maturity.
By Maturity Period
A fixed income instrument that matures in 1 year or less is called a bill. A popular
example is the short-term debt obligation of governments, usually called Treasury
Bills or T-Bills.
A debt obligation that matures between 2 and 10 years is called a note. An
example is the governmentsTreasury Note or T-note.
As explained earlier, a fixed income instrument that matures in 10 years or more is
called a bond.
By the Issuer
A fixed-income instrument issued by the national government through its Treasury
Department is calledTreasury Securities. Depending on the maturity period, these
may be Treasury Bills (T-bills), Treasury Notes (T-notes, or Treasury Bonds (T-bonds).
Government agencies can also issue bonds to raise funds. Examples of these
agencies in the US include the Government National Mortgage Association (GNMA)
or Ginnie Mae and government-sponsored enterprises Federal National Mortgage
Association (Fannie Mae), Federal Home Loan Bank Corporation (Freddie Mac),
and Student Loan Marketing Association (Sallie Mae). In the Philippines,PAG-IBIG
or the Home Development Mutual Fund also issues bonds to raise needed
capital.
Local government units sometimes also use debt instruments to acquire funds.
Municipal bonds backed by the full taxing power of the municipality is called
a General Obligation Bond. Bonds issued by the municipality to finance a
government project whose interest and principal payments are dependent on the
income of that project are called Revenue Bonds. In the Philippines, examples of
municipal bonds are the Puerto Princesa Green Bonds, Boracay-Aklan Provincial
Bonds, and Tagaytay City Tourism Bonds.
Lastly, a bond issued by a business entity is called a Corporate Bond. As explained
in the first article of this series, corporations use bonds as an alternative to stocks in
raising capital. Examples of companies in the Philippines regularly issuing corporate
bonds include Ayala Corporation, Globe Telecom, JG Summit Corporation, Filinvest
Land, and many more.
By the Interest Coupon Structure
In Part of this series, you learned how a bond investor earns from the
regular coupon interest payment. Not all bonds pay regular interest though.
A bond that does not pay any interest rate is called a Zero-Coupon Bond. Since
investors dont receive interest payments, the only way for them to earn is to buy

these bonds at huge discounts so they can profit afterwards when the bonds are
redeemed at their par value.
Bonds with a stated interest rate but are not paid until maturity are called Accrual
Bonds. Investors dont receive interest prior to maturity but they accrue and
compound and are paid during the maturity period.
A bond that pays an initial interest rate for the first period then a higher rate after
that period is called a Step-Up Bond. For example, a 10-year maturity bond may
offer 5% fixed interest for the first 4 years then starting on the 5th year, the interest
rate is 7%.
Floating-Rate Bonds are bonds whose coupon rate is linked to a benchmark rate.
This benchmark rate may be the countrys inflation rate, the London Interbank
Offered Rate (LIBOR) or other rates. A floating-rate bond, for example, that pays a
coupon rate equal to 2% plus the inflation rate will pay 5% if the inflation rate is 3%.
If the interest rate is 5%, the bond will pay 7%