{"id":307,"date":"2024-09-06T16:48:30","date_gmt":"2024-09-06T16:48:30","guid":{"rendered":"https:\/\/content.one.lumenlearning.com\/financialaccounting\/chapter\/types-of-bonds\/"},"modified":"2024-09-11T20:22:21","modified_gmt":"2024-09-11T20:22:21","slug":"types-of-bonds","status":"publish","type":"chapter","link":"https:\/\/content.one.lumenlearning.com\/financialaccounting\/chapter\/types-of-bonds\/","title":{"raw":"Types of Bonds","rendered":"Types of Bonds"},"content":{"raw":"<section class=\"textbox learningGoals\" aria-label=\"Learning Goals\">\r\n<ul>\r\n \t<li>Describe various types of bonds<\/li>\r\n<\/ul>\r\n<\/section>&nbsp;\r\n\r\nDebt financing has a language of its own, so before we delve into the types of bonds, let\u2019s review some financial terms related to bonds.\r\n\r\n<strong>Issuer:\u00a0<\/strong>The entities that borrow money by issuing bonds which include the government, government agencies, municipal bodies, and corporations.\r\n\r\n<strong>Face Value:\u00a0<\/strong>The principal amount that is returned on maturity. As you will see, this is not always the amount of the proceeds that the issuer receives.\r\n\r\n<strong><a href=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5107\/2020\/10\/02222130\/coupon-5219531_1920.jpg\"><img class=\"size-medium wp-image-4963 alignright\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5107\/2020\/10\/02222130\/coupon-5219531_1920-300x200.jpg\" alt=\"The words &quot;coupon code&quot; on the screen of a smartphone.\" width=\"300\" height=\"200\" \/><\/a>Coupon:<\/strong> The rate of interest paid on the bond. Bonds used to be printed on paper and the holder would redeem a coupon in order to get paid.\r\n\r\n<strong>Rating:<\/strong> Every bond is usually rated by credit rating agencies. A higher credit rating usually results in a lower coupon rate.\r\n\r\n<strong>Coupon payment frequency:<\/strong> The coupon (interest) payments on the bond usually have a payment frequency. The coupons are usually paid annually or semi-annually; however, they may be paid quarterly or monthly as well.\r\n\r\n<strong>Yield:\u00a0<\/strong>The effective return the investor makes on the bond is called the yield. If you buy a bond for $1000 with a 10% coupon that pays semi-annually, you get $50 every six months in interest and the yield is 10%. However, if market rates are different than the coupon rate, you may pay more or less than the face value of $1000 for the bond in order to get a yield that is the equivalent to the market rate. We\u2019ll cover this later.\r\n\r\n<strong><img class=\"alignright wp-image-4965 size-medium\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5107\/2020\/10\/02222317\/historical-stock-5100671_1920-300x200.jpg\" alt=\"A collection of stock and bond bank notes.\" width=\"300\" height=\"200\" \/>Different types of bonds:\u00a0<\/strong>The simplest bond has a fixed interest rate and a defined maturity and is usually issued and redeemed at the face value. It is also known as a straight bond or a bullet bond or even a plain vanilla bond.\r\n\r\n<strong>Zero coupon bonds:<\/strong> A zero coupon bond is a type of bond where there are no coupon payments made. It is not that there is no yield; the zero coupon bonds are issued at a price lower than the face value (say $950) and then pay the face value on maturity ($1000). The difference will be the yield for the investor.\r\n\r\n<strong>Convertible bonds:<\/strong> Convertible bonds are a special variety of bonds that can be converted to equity shares at a specified time at a pre-set conversion price. These kinds of bonds are often used in start-up financing by investors who want the initial security of debt but who might later want to buy into the company as shareholders.\r\n\r\n<strong>Callable bonds:\u00a0<\/strong>Bonds that are issued with a specific feature where the issuer has the right to buy back the bonds at a pre-agreed price and a pre-fixed date are callable bonds. Since these bonds allow a benefit to the issuer to repay off the liability before maturity, these bonds usually offer a coupon rate higher than a normal straight coupon-bearing bond.\r\n\r\n<strong>Puttable bonds:\u00a0<\/strong>Bonds are issued with a specific feature where the bondholder has the right to sell back the bonds at a pre-fixed date before maturity are puttable bonds. Since these bonds allow a benefit to the bondholders to ask for the principal repayment before maturity, these bonds usually offer a coupon rate lower than a normal straight coupon-bearing bond.\r\n\r\n<strong>Serial bonds:\u00a0<\/strong>A serial bond is a bond issue structured so that a portion of the outstanding bonds mature at regular intervals until all of the bonds have matured. Because the bonds mature gradually over a period of years, these bonds are used to finance projects that provide a consistent income stream for bond repayment.\r\n\r\nIn addition, bonds, like notes payable, could be secured or unsecured, and there is a specific class of high-risk, high-yield bonds called junk bonds that are usually unsecured and likely to not be repaid, hence the high yield.\r\n\r\n<section class=\"textbox tryIt\" aria-label=\"Try It\">[ohm2_question hide_question_numbers=1]25208[\/ohm2_question]<\/section>","rendered":"<section class=\"textbox learningGoals\" aria-label=\"Learning Goals\">\n<ul>\n<li>Describe various types of bonds<\/li>\n<\/ul>\n<\/section>\n<p>&nbsp;<\/p>\n<p>Debt financing has a language of its own, so before we delve into the types of bonds, let\u2019s review some financial terms related to bonds.<\/p>\n<p><strong>Issuer:\u00a0<\/strong>The entities that borrow money by issuing bonds which include the government, government agencies, municipal bodies, and corporations.<\/p>\n<p><strong>Face Value:\u00a0<\/strong>The principal amount that is returned on maturity. As you will see, this is not always the amount of the proceeds that the issuer receives.<\/p>\n<p><strong><a href=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5107\/2020\/10\/02222130\/coupon-5219531_1920.jpg\"><img loading=\"lazy\" decoding=\"async\" class=\"size-medium wp-image-4963 alignright\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5107\/2020\/10\/02222130\/coupon-5219531_1920-300x200.jpg\" alt=\"The words &quot;coupon code&quot; on the screen of a smartphone.\" width=\"300\" height=\"200\" \/><\/a>Coupon:<\/strong> The rate of interest paid on the bond. Bonds used to be printed on paper and the holder would redeem a coupon in order to get paid.<\/p>\n<p><strong>Rating:<\/strong> Every bond is usually rated by credit rating agencies. A higher credit rating usually results in a lower coupon rate.<\/p>\n<p><strong>Coupon payment frequency:<\/strong> The coupon (interest) payments on the bond usually have a payment frequency. The coupons are usually paid annually or semi-annually; however, they may be paid quarterly or monthly as well.<\/p>\n<p><strong>Yield:\u00a0<\/strong>The effective return the investor makes on the bond is called the yield. If you buy a bond for $1000 with a 10% coupon that pays semi-annually, you get $50 every six months in interest and the yield is 10%. However, if market rates are different than the coupon rate, you may pay more or less than the face value of $1000 for the bond in order to get a yield that is the equivalent to the market rate. We\u2019ll cover this later.<\/p>\n<p><strong><img loading=\"lazy\" decoding=\"async\" class=\"alignright wp-image-4965 size-medium\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5107\/2020\/10\/02222317\/historical-stock-5100671_1920-300x200.jpg\" alt=\"A collection of stock and bond bank notes.\" width=\"300\" height=\"200\" \/>Different types of bonds:\u00a0<\/strong>The simplest bond has a fixed interest rate and a defined maturity and is usually issued and redeemed at the face value. It is also known as a straight bond or a bullet bond or even a plain vanilla bond.<\/p>\n<p><strong>Zero coupon bonds:<\/strong> A zero coupon bond is a type of bond where there are no coupon payments made. It is not that there is no yield; the zero coupon bonds are issued at a price lower than the face value (say $950) and then pay the face value on maturity ($1000). The difference will be the yield for the investor.<\/p>\n<p><strong>Convertible bonds:<\/strong> Convertible bonds are a special variety of bonds that can be converted to equity shares at a specified time at a pre-set conversion price. These kinds of bonds are often used in start-up financing by investors who want the initial security of debt but who might later want to buy into the company as shareholders.<\/p>\n<p><strong>Callable bonds:\u00a0<\/strong>Bonds that are issued with a specific feature where the issuer has the right to buy back the bonds at a pre-agreed price and a pre-fixed date are callable bonds. Since these bonds allow a benefit to the issuer to repay off the liability before maturity, these bonds usually offer a coupon rate higher than a normal straight coupon-bearing bond.<\/p>\n<p><strong>Puttable bonds:\u00a0<\/strong>Bonds are issued with a specific feature where the bondholder has the right to sell back the bonds at a pre-fixed date before maturity are puttable bonds. Since these bonds allow a benefit to the bondholders to ask for the principal repayment before maturity, these bonds usually offer a coupon rate lower than a normal straight coupon-bearing bond.<\/p>\n<p><strong>Serial bonds:\u00a0<\/strong>A serial bond is a bond issue structured so that a portion of the outstanding bonds mature at regular intervals until all of the bonds have matured. Because the bonds mature gradually over a period of years, these bonds are used to finance projects that provide a consistent income stream for bond repayment.<\/p>\n<p>In addition, bonds, like notes payable, could be secured or unsecured, and there is a specific class of high-risk, high-yield bonds called junk bonds that are usually unsecured and likely to not be repaid, hence the high yield.<\/p>\n<section class=\"textbox tryIt\" aria-label=\"Try It\"><iframe loading=\"lazy\" id=\"ohm25208\" class=\"resizable\" src=\"https:\/\/ohm.one.lumenlearning.com\/multiembedq.php?id=25208&theme=lumen&iframe_resize_id=ohm25208&source=tnh\" width=\"100%\" height=\"150\"><\/iframe><\/section>\n","protected":false},"author":6,"menu_order":7,"template":"","meta":{"_candela_citation":"[{\"type\":\"original\",\"description\":\"Types of Bonds\",\"author\":\"Joseph Cooke\",\"organization\":\"Lumen Learning\",\"url\":\"\",\"project\":\"\",\"license\":\"cc-by\",\"license_terms\":\"\"},{\"type\":\"copyrighted_video\",\"description\":\"Types of Bonds\",\"author\":\"Education Unlocked\",\"organization\":\"\",\"url\":\"https:\/\/youtu.be\/Jj0V01Arebk\",\"project\":\"\",\"license\":\"arr\",\"license_terms\":\"Standard YouTube license\"},{\"type\":\"cc\",\"description\":\"\",\"author\":\"Markus Winkler\",\"organization\":\"\",\"url\":\"https:\/\/pixabay.com\/photos\/coupon-code-discount-sale-business-5219531\/\",\"project\":\"\",\"license\":\"cc0\",\"license_terms\":\"https:\/\/pixabay.com\/service\/terms\/#license\"},{\"type\":\"cc\",\"description\":\"\",\"author\":\"pictavio\",\"organization\":\"\",\"url\":\"https:\/\/pixabay.com\/photos\/historical-stock-securities-5100671\/\",\"project\":\"\",\"license\":\"cc0\",\"license_terms\":\"https:\/\/pixabay.com\/service\/terms\/#license\"}]","pb_show_title":"on","pb_short_title":"","pb_subtitle":"","pb_authors":[],"pb_section_license":""},"chapter-type":[],"contributor":[],"license":[],"part":300,"module-header":"- Select Header -","content_attributions":[{"type":"original","description":"Types of Bonds","author":"Joseph Cooke","organization":"Lumen Learning","url":"","project":"","license":"cc-by","license_terms":""},{"type":"copyrighted_video","description":"Types of Bonds","author":"Education Unlocked","organization":"","url":"https:\/\/youtu.be\/Jj0V01Arebk","project":"","license":"arr","license_terms":"Standard YouTube license"},{"type":"cc","description":"","author":"Markus Winkler","organization":"","url":"https:\/\/pixabay.com\/photos\/coupon-code-discount-sale-business-5219531\/","project":"","license":"cc0","license_terms":"https:\/\/pixabay.com\/service\/terms\/#license"},{"type":"cc","description":"","author":"pictavio","organization":"","url":"https:\/\/pixabay.com\/photos\/historical-stock-securities-5100671\/","project":"","license":"cc0","license_terms":"https:\/\/pixabay.com\/service\/terms\/#license"}],"internal_book_links":[],"video_content":null,"cc_video_embed_content":{"cc_scripts":"","media_targets":[]},"try_it_collection":null,"_links":{"self":[{"href":"https:\/\/content.one.lumenlearning.com\/financialaccounting\/wp-json\/pressbooks\/v2\/chapters\/307"}],"collection":[{"href":"https:\/\/content.one.lumenlearning.com\/financialaccounting\/wp-json\/pressbooks\/v2\/chapters"}],"about":[{"href":"https:\/\/content.one.lumenlearning.com\/financialaccounting\/wp-json\/wp\/v2\/types\/chapter"}],"author":[{"embeddable":true,"href":"https:\/\/content.one.lumenlearning.com\/financialaccounting\/wp-json\/wp\/v2\/users\/6"}],"version-history":[{"count":3,"href":"https:\/\/content.one.lumenlearning.com\/financialaccounting\/wp-json\/pressbooks\/v2\/chapters\/307\/revisions"}],"predecessor-version":[{"id":987,"href":"https:\/\/content.one.lumenlearning.com\/financialaccounting\/wp-json\/pressbooks\/v2\/chapters\/307\/revisions\/987"}],"part":[{"href":"https:\/\/content.one.lumenlearning.com\/financialaccounting\/wp-json\/pressbooks\/v2\/parts\/300"}],"metadata":[{"href":"https:\/\/content.one.lumenlearning.com\/financialaccounting\/wp-json\/pressbooks\/v2\/chapters\/307\/metadata\/"}],"wp:attachment":[{"href":"https:\/\/content.one.lumenlearning.com\/financialaccounting\/wp-json\/wp\/v2\/media?parent=307"}],"wp:term":[{"taxonomy":"chapter-type","embeddable":true,"href":"https:\/\/content.one.lumenlearning.com\/financialaccounting\/wp-json\/pressbooks\/v2\/chapter-type?post=307"},{"taxonomy":"contributor","embeddable":true,"href":"https:\/\/content.one.lumenlearning.com\/financialaccounting\/wp-json\/wp\/v2\/contributor?post=307"},{"taxonomy":"license","embeddable":true,"href":"https:\/\/content.one.lumenlearning.com\/financialaccounting\/wp-json\/wp\/v2\/license?post=307"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}