Different Types of Bonds - Basics of Bonds

Types of Bonds is an important topic with regard to Banking Awareness and the General Awareness part of the various Government exams conducted in the country. 

Candidates must know questions related to the financial terms are mostly asked in the Current Affairs, General Awareness or the Banking Awareness section of all major Government exams, especially Bank and Insurance exams. 

It is important to have a wide and clear idea of the financial Institutions and financial terms if you are willing to appear for any such competitive exam.

To know the detailed syllabus of Banking Awareness, aspirants can visit the linked article and start their preparation accordingly. 

Through this article, aspirants will understand what is a bond, what are Government bonds, the different types of bonds and their characteristic features. Questions based on this topic may be generic or may be picked up from any current events in the financial market.

Candidates may also find a few sample questions based on Bonds and its types. This will enable candidates to understand the types of questions which may be asked from this topic.

Given below are a few related links for the reference of candidates:

Before learning about the different types of Bonds. It is important that a candidate knows what are Bonds. So starting with the basics of a bond, let us first answer a few basic questions based on bonds.

• What is a Bond?

By Definition, “A Bond is a fixed income instrument that represents a loan made by an investor to a borrower.” In simpler words, bond acts as a contract between the investor and the borrower. Mostly companies and government issue bonds and investors buy those bonds as a savings and security option. 

These bonds have a maturity date and when once that is attained, the issuing company needs to pay back the amount to the investor along with a part of the profit. This kind of dealing with bonds between the issuer and the investor is done by brokers.

• What are Government Bonds?

A bond issued by the Government of a country at a fixed rate of interest is called Government Bonds. These kinds of bonds are considered to be low-risk investments. Examples of Government bonds include Treasury Bills, Municipal Bonds, Zero-coupon Bonds, etc. 

Aspirants must also know about the Indian Financial System and its components. To study about the same, visit the linked article.

When an Investor is buying bonds, there are a few things which may be given consideration before investing in them. Given below are such important points to remember while investing in any bond:

• Secured & Unsecured Bonds: Unsecured Bonds, also known as debentures are mostly the bonds issued by companies with a good reputation, high credit rating and the credibility of the company. The returns on such bonds are based on the profit and the success of the company. If the company makes a profit, then the amount along with interest is returned to the investor, else there may be difficulty in regaining the invested amount as well.  The secured bonds offer some kind of security to the investor. These bonds are mostly considered to be Government bonds.
• Taxation: Looks for bonds which exempt tax. Few corporate bonds levy tax on their bonds and bonds issued by Government, municipality bonds and few other do not impose a tax on the profit earned.
• Preference of Liquidation: In case a Company gets in loss and is in debt, the money gained by selling the assets of the company is given in a certain order of preference. This is called preference of liquidation. The regained amount is distributed in ascending order of time in which the investments were made. Starting with the oldest Investors and then to the new ones.
• Date of Maturity: Ensure that you check the maturity period of the bond and invest in something where you can earn more with a shorter time duration
• Coupon Rate: The rate of interest at which a bond is issued and the Company is liable to pay the Investor is called the coupon rate. Research and look for Bond options which offer high coupon rate 

The above-mentioned things are among a few which an investor must read through while buying a bond.

The links to the detailed syllabus for the various government exams are given below:

There are various types of Bonds. A few of them have been discussed below in brief.

• Traditional Bond: A bond in which the entire principal can be withdrawn at a single time after the bond’s maturity date is over is called a Traditional Bond.
• Callable Bond: When the issuer of the bond calls out his right to redeem the bond even before it reaches its maturity is called a Callable Bond. Through this type of bonds, the issuer can convert a high debt bond into a low debt bond.
• Fixed-Rate Bonds: When the coupon rate remains the same through the course of the investment, it is called Fixed-rate bonds.
• Floating Rate Bonds: When the coupon rate keeps fluctuating during the course of an investment, it is called a floating rate bond.
• Puttable Bond: When the investor decides to sell their bond and get their money back before the maturity date, such type of bond is called a Puttable bond.
• Mortgage Bond: The bonds which are backed up by the real estate companies and equipment are called mortgage bonds.
• Zero-Coupon Bond: When the coupon rate is zero and the issuer is only applicable to repay the principal amount to the investor, such type of bonds are called zero-coupon bonds.
• Serial Bond: When the issuer continues to pay back the loan amount to the investor every year in small instalments to reduce the final debt, such type of bond is called a Serial Bond.
• Extendable Bonds: The bonds which allow the Investor to extend the maturity period of the bond are called Extendable Bonds.
• Climate Bonds: Climate Bonds are issued by any government to raise funds when the country concerned faces any adverse changes in climatic conditions.
• War Bonds: War Bonds are issued by any government to raise funds in cases of war.
• Inflation-Linked Bonds: Bonds linked to inflation are called inflation linked bonds. The interest rate of Inflation linked bonds is generally lower than fixed rate bonds

Other Related Links:

A few things to remember about the various bond types have been given below. Refer to these with respect to the upcoming government exams:

• The repayment done through a Traditional Bond is also known as Bullet Repayment.
• Bonds with a maturity period of 7 to 10 years are called “Notes”.
• The Bonds can be categorised into four variants: Corporate Bonds, Municipal Bonds, Government Bonds and Agency Bonds.
• The Bond prices are inversely proportional to the Coupon Rate. When the rate of interest increases the bond prices decrease and rate of interest decreases, the bond price increases.
• The amount which the investor is liable to get after maturity of the bond is called its Face Value.
• The amount at which the Investor buys a Bond is called its Issue Price.

Once a candidate goes through the entire description give above about Bonds, it types and its characteristics candidates shall be further able to answer the questions given below which may be asked with respect to the same.

Given below a few sample questions from the topic: Bonds and Its Types, for the assistance of candidates and to help them understand the pattern in which the questions may be asked.

Q 1. What are the Bonds with the Maturity Period of 7 to 10 years are also known as?

1. Young Bonds
2. Notes
3. Paper Bonds
4. Bills
5. None of the Above

Answer: (2) Notes

Q 2. Which of the following bonds mean that the rate of interest for the entire duration of Bond, until it matures, remains the same?

1. Zero-Coupon Bond
2. Callable Bond
3. Fixed-Rate Bonds
4. Serial Bonds
5. Extendable Bonds

Answer: (3) Fixed-Rate Bonds

Q 3. What is the other name for the repayment done by a Traditional Bond?

1. Bullet Repayment
2. Fixed Repayment
3. Quick Repayment
4. Rapid Repayment
5. Series Repayment

Answer: (1) Bullet Repayment

Q 4. What term is used to define the payment that an Investor gets after the maturity of the Bond?

1. Issue Price
2. Investment Value
3. Final Value
4. Face Value
5. Fixed Value

Answer: (4) Face Value

Q.5 What is the maturity period for medium-term bonds?

1. 1-5 Years
2. 5-8 Years
3. Over 10 Years
4. Less Than 10 Years
5. More than 15 Years

Answer (3) Over 10 years

More questions of the same type may be asked in the final examinations. Candidates must also stay up to date with the latest news and current affairs based on any update regarding the bond as questions from this topic may also be asked based on current events.

Candidates who intend to appear for the upcoming Government exam recruitment can get exam information along with study material, preparation tips and syllabus details at BYJU’S.