Commonly traded bond market products
EVERYONE needs to put some money aside in order to be able to meet future financial commitments or obligations.
In this case one needs to look for an investment promising maximum return at the lowest risk. It is always advisable for investors to diversify their portfolios through a range of available capital market instruments.
Bonds are one common type of instrument that investors can also consider. Diversification can be done in varying percentages depending on individual tastes, risk appetite and objectives. Below is a selection of commonly traded types of bonds:
Fixed rate bonds have a constant interest rate throughout their life.
Floating rate bonds have interest rates that fluctuate in line with market dynamics.
Convertible bonds can be converted into a specified number of shares of common stock in the issuing company or cash of equal value.
Zero-coupon bonds are issued at a substantial discount to par value so that the interest is effectively rolled up to maturity.
Indexed bonds have their cash flows linked to a business or economic indicator e.g. income, inflation amongst others.
Asset backed securities are bonds whose interest and principal payments are backed by cash flows from an underlying asset e.g. mortgage-backed securities.
Perpetual bonds (perpetuities) have no maturity date.
Subordinated bonds are bonds whose payout is given less priority by the company in time of liquidation.
Senior debt is given more priority and thus paid first in time of liquidation.
Bearer bonds do not carry the name of the bond holder hence anyone in possession of the bond certificate can claim ownership.
Corporate bonds are issued by corporations to raise money for capital expenditures, operations and acquisitions.
Callable bonds allow the issuer to retain the privilege of redeeming the bond before maturity.
Non-callable bonds stipulate that the bond cannot be redeemed before its maturity date.
Government bonds are issued by the Government to support national expenditure.
Municipal bonds are issued by local government authorities.