Corporate bonds can vary structure and risk. Corporate bonds are important part of pension schemes. Further, you can see examples of corporate bonds. And also see importance of bond market in economy. You can check role of bond in an economy. Thus see High-yield bond. Below are some of types of corporate bonds.
Fixed Rate Bond / Straight Bond / Plain Vanilla Bond
This is most popular type of corporate bond traded in most of markets. There is paying semiannual with fix coupon over their life and principal at end of maturity. You can see Government bond definition. Thus check corporate bonds rates and also see corporate bonds interest rates.
Floating Rate Bond
These bonds are usually pay. And coupon rate is not fixed throughout life and varies over time with some benchmark rate. These types of bonds may have some Floor or Cap attached on it. To represent even if benchmark rate change by any value. But, coupon rate will always lies within floor and cap rate. But MIBOR, Call Rate, T-bill rate, PLR etc rates are use in Indian Market. Zero coupon bonds
Usually, most types of bonds are offer at fixed interest rate. Yet, zero coupon bonds do not come with any specific coupon rate or interest rate. They are offer at discount on face value and on maturity. You will get face value back.
By investing in this type of bond you will receive tax exempt on interest income as long as. You hold bond or until its period of maturity. There are many other types of bonds available in market. Above mention is most common bond in India.
These bonds are issue by companies that are not very stable. These bonds are consider below investment grade. It is risky to trade for you. And to put money in such bonds issuing company. Usually offers high rate of return.
Junk bond also known as high-yield bond or speculative bond. And it is rate as BB or lower bond. Because of its high default risk. But Junk bonds offer interest rates four percent high than government issues. See difference between corporate bond and government bond
Callable bond is common bonds also called as usable bonds. It can be redeem by issuer before maturity. Usually bond is call premium bond. Call provision is decline in interest rates. Most municipal bonds and corporate bonds are callable. Treasury bonds and notes with few exceptions are noncallable.
But price of callable bond will not raise much above its call price. Thus no matter how low interest rates go. Because drop interest rate increase likelihood. Before you buy bond always see if bond has call provision. And think how that impacts your investment strategy.
Secure or Unsecure Bonds
Corporate bonds either secure against assets of corporate or can also unsecure. Holder of secure corporate bonds is winding up of company. And it can be repaid by selling assets against which bonds were secure. Senior secure bonds are rank high than holder of subordinated secure bonds
In case of closure of company unsecure bonds will repay of dues. So unsecure bond holders are pay before any payment made to holder issued by corporate. Thus check Advantages & Disadvantages of Buying Bonds
Debentures are also fixed interest debt instruments with different maturity. But is usually secure in nature and offers lower interest comparative to bonds. Thus Debentures are base on their convertibility to form of equity. There are three types of debentures. Such as Nonconvertible (NCD), Convertible (PCD) and Convertible Debenture (FCD).
Risks and Return in Corporate Bonds
You want to buy bond. There are four key risks attributes. Like Issuer, Currency, Coupon and Maturity. And they will assess to determine whether bond is good with their portfolio and price is fair.
Issuer – Bond Issuer defines credit risk of bond. Otherwise, it describes likelihood of bond. Company will repay your periodic returns (if any) and face value at end of maturity. But risk is reflecting by credit rating allotted to bond issuer by external rating agency (s).
Currency − unlike equity, bond can be issue in many currencies. Thus, bond markets talk about currency of issuance and not country of issuance. Hence, currency of bond defines second key risk characteristic of bond.
Coupon – Coupon rate defines rate of interest expect to be pay on bond issue. This interest can be pay annual, semi‐annual or even every 3 months. It depends on bond structure. But stated coupon rate is link to face value not actual price (higher or lower than face value) pay. And size of coupon can also give sign of credit risk of bond. So you can more interest to compensate for high risk.
Maturity – In case of equity, bonds have specific life or maturity after which you get your money back. Longer date of maturity is more likelihood. Because, that bond issuer may get into trouble and may fail to settle claim. But it leads high credit risk for corporate bonds. Thus, corporate bonds with longer maturity always attract higher risk premium.
Finally, see three types of corporate bonds. And also see comparison between bonds and stocks. For better understand examples of corporate bonds. Hence, you can see corporate bonds advantages and disadvantages of bonds. But, see list of corporate bonds.