Bonds that are issued at different rates of interest are called bond rates. A bond issued by a government or corporate entity for raising money. By issuing bonds, these entities take loans from investors for a specific period of time and utilize them for financing a wide range of projects and functions.
The bond market is a part of the capital and stock markets. While stock is called equity instruments, bonds, on the other hand, are known as debt instruments. They are also called fixed income securities, because the lender knows the exact cash amount he will be receiving at the time of maturity.
There are different kinds of bonds, such as Government Bonds, Municipal Bonds, Corporate Bonds, and Zero Coupon Bonds etc.
The face value, par value or principal, is the amount a lender is going to receive at the time of maturity of a bond, and on which interest is paid by the issuer.
The coupon rate is the rate of interest paid by the issuer to the lender. Usually, interest is paid every six months. This rate is mainly determined by the credit rating and duration of the bond. When rates increase, the bond prices in the market go down and vice-versa, and when prices in increase, the yield or return goes down, and vice-versa.
According to the coupon rates, bonds are categorized into six types.
- Fixed Rate Bonds: The rate is fixed or predetermined for the whole life of the bond.
- Floating Rate Bonds: The rate is associated with a money market index, for example Libor or Euribor, and a spread (it remains constant) is clubbed to that federal funds rate. Usually, the interest is paid every three months or quarterly.
- Zero Coupon Bonds: No interest payment is done. They are traded at a discount from the maturity value.
- Inflation linked Bonds: The par value is linked to inflation. This is done in order to eliminate risk of inflation.
- Commercial Paper: Is issued by leading banks and corporations for a short term.
- Perpetual Bonds: Has no date of maturity and are also known as perpetuities. The coupon is paid perpetually so there is a perpetual cash flow.
