Fixed rate bond

A fixed rate bond is a bond that pays the same level of interest over its entire term. An investor who wants to earn a guaranteed interest rate for a specified term could purchase a fixed rate bond in the form of a Treasury, corporate bond, municipal bond, or certificate of deposit (CD). Because of their constant and level interest rate, these are known broadly as fixed-income securities.

 Floating-interest bonds

These bonds incur coupon rates which are subject to market fluctuations and elastic within their tenures. The return on investment through interest income is thus inconsistent as it is determined by market factors such as inflation, condition of the economy, and confidence of investors in an entity’s bonds.

Inflation-linked bonds

Inflation-linked bonds are special debt instruments designed to curb the impact of economic inflation on the face value and interest return. The coupon rates offered on inflation-linked bonds are usually lower than fixed-interest bonds.

ILBs thus aim to reduce the negative consequences of inflation by adjusting coupons concerning prevailing rates in the debt market.

Perpetual bonds

Perpetual bonds are fixed-security investment options whereby issuers do not have to return the principal amount to the purchaser. This investment type does not have any maturity period, and customers benefit from steady interest payments for perpetuity. These debt instruments are also called ‘consol bonds’ or ‘perp’.

Most bonds share some common basic features including:

Face value 

Face value is the money amount the bond will be worth at maturity; it is also the reference amount the bond issuer uses when calculating interest payments. For example, say an investor purchases a bond at a premium $1,030 and another investor buys the same bond later when it is trading at a discount for $950. When the bond matures, both investors will receive the $1,000 face value of the bond.

The coupon rate 

The coupon rate is the rate of interest the bond issuer will pay on the face value of the bond, expressed as a percentage. For example, a 5% coupon rate means that bondholders will receive 5% x $1000 face value = $50 every year.

Coupon dates 

Coupon dates are the dates on which the bond issuer will make interest payments. Payments can be made in any interval, but the standard is semiannual payments.

The maturity date 

The maturity date is the date on which the bond will mature and the bond issuer will pay the bondholder the face value of the bond.

The issue price 

The issue price is the price at which the bond issuer originally sells the bonds.

There are four primary categories of bonds sold in the markets. However, you may also see foreign bonds issued by corporations and governments on some platforms.

Corporate bonds 

Corporate bonds are issued by companies. Companies issue bonds rather than seek bank loans for debt financing in many cases because bond markets offer more favorable terms and lower interest rates.

Municipal bonds 

Municipal bonds are issued by states and municipalities. Some municipal bonds offer tax-free coupon income for investors.

Government bonds 

Government bonds such as those issued by the U.S. Treasury, Bonds issued by the Treasury with a year or less to maturity are called “Bills”; bonds issued with 1–10 years to maturity are called “notes”; and bonds issued with more than 10 years to maturity are called “bonds”. The entire category of bonds issued by a government treasury is often collectively referred to as “treasuries.” Government bonds issued by national governments may be referred to as sovereign debt.

Agency bonds 

Agency bonds are those issued by government-affiliated organizations such as Fannie Mae or Freddie Mac.

1. Low Volatility 

Bonds have a clear advantage over other securities. The volatility of bonds is lower than that of equities (stocks). Thus bonds are generally viewed as safer investments than stocks.

2. Capital Preservation 

Unlike equities, high-quality fixed income securities can serve as an all-weather foundation for a portfolio. This advantage can be seen even when looking at medium-term rolling returns for bonds or bond funds with capital preservation as their chief objective.

3. High Liquidity 

Bonds are often liquid. It is often fairly easy for an institution to sell a large quantity of bonds without affecting the price much, which may be more difficult for equities.

4. Diversification

Almost every investor has heard the phrase “don’t put your eggs in one basket.” It may be a cliché, but it’s time-tested wisdom nonetheless. Over time, greater diversification can provide investors with better risk-adjusted returns (in other words, the amount of return relative to the amount of risk) than portfolios with a narrower focus. More important, bonds can help reduce volatility – and preserve capital – for equity investors during the times when the stock market is falling.

1. Interest rates 

Bond prices rise when rates fall and fall when rates rise. Your bond portfolio could suffer market price losses in a rising rate environment. 

2. Volatility risk

Bond market volatility could affect the prices of individual bonds, regardless of the issuers’ underlying fundamentals.

3. Credit risk

Credit risk means that issuers could default on their interest and principal repayment obligations if they run into cash-flow problems.