HOW TO INVEST IN BONDS

Bond is an instrument of appreciation from the bond issuer to the bond holders. It is a debt security, under which the issuer owes the holders a debt. Depending on the terms of the bond, the issuer is obliged to pay the holder an interest and/or to repay the principal at the maturity date.

Features of a bond

1)Principal-it is the amount on which the issuer pays interest.

2)Maturity of bond –it is the length of time until the when the issuer has to repay the nominal amount.

3)Coupon -it is the interest rate that the issuer pays to the holder.

4)Yield -it is the rate of return received from investing in the bond.

5)Credit Quality - the probability that the bondholders will receive the amounts promised at the due dates.

6)Indentures and Covenants - indenture is a formal debt agreement that establishes the terms of a bond issue, while covenants are the clauses of such an agreement.

Types of bonds

1)Fixed rate bonds –they have a coupon that remains constant throughout the life of the bond.

2)Floating rate notes (FRNs) - have a variable coupon that is linked to a reference rate of interest.

3)Zero-coupon bonds -they pay no regular interest.

4)High-yield bonds (junk bonds) - they are rated below investment grade by the credit rating agencies.

5)Convertible bonds – they let a bond holder exchange a bond to a number of shares of the issuer's common stock.

6)Exchangeable bonds - they allows for exchange to shares of a corporation other than the issuer.

7)Inflation-indexed bonds - here the principal amount and the interest payments are indexed to inflation.

8)Subordinated bonds – they are those that have a lower priority than other bonds of the issuer in case of liquidation.

9)Covered bonds – they are backed by cash flows from mortgages or public sector assets.

10)Perpetual bonds - They have no maturity date.

11)Bearer bond – it is an official certificate issued without a named holder meaning the person who has the paper certificate can claim the value of the bond.

12)Government bond – they are also called Treasury bond and are issued by a national government.

13)Lottery bonds – they are issued by European and other states. Interest is paid as on a traditional fixed rate bond, but the issuer will redeem randomly selected individual bonds within the issue according to a schedule.

14)War bond - is a bond issued by a country to fund a war.

15)Serial bond - is a bond that matures in instalments over a period of time.

16)Revenue bond - is a special type of municipal bond distinguished by its guarantee of repayment solely from revenues generated by a specified revenue-generating entity associated with the purpose of the bonds.

17)Climate bond - is a bond issued by a government or corporate entity in order to raise finance for climate change mitigation.