In finance, there are many types of bonds. This section provides a overview of the most common types that exist in the financial world today.
Secured bonds
This is a bond for which a company has pledged specific property to ensure its payment.
Mortgage bonds
The most common secured bonds. It is a legal claim (lien) on specific property that gives the bondholder the right to possess the pledged property if the company fails to make required payments.
Unsecured bonds
A debenture bond, or simply a debenture. This is an unsecured bond backed only by the general creditworthiness of the issuer, not by a lien on any specific property. More easily issued by a company that is financially sound.
Registered bonds
This bears the owner's name on the bond certificate and in the register of bond owners kept by the bond issuer or its agent, the registrar. Bonds may be registered as to principal (or face value of the bond) or as to both principal and interest. Most bonds in our economy are registered as to principal only. For a bond registered as to both principal and interest, the issuer pays the bond interest by check. To transfer ownership of registered bonds, the owner endorses the bond and registers it in the new owner's name.Therefore, owners can easily replace lost or stolen registered bonds.
Unregistered (bearer) bonds
This is the property of its holder or bearer and the owner's name does not appear on the bond certificate or in a separate record. Physical delivery of the bond transfers ownership.
Coupon bonds
These are not registered as to interest. Coupon bonds carry detachable coupons for the interest they pay. At the end of each interest period, the owner clips the coupon for the period and presents it to a stated party, usually a bank, for collection.
Term bonds and serial bonds
A term bond matures on the same date as all other bonds in a given bond issue. Serial bonds in a given bond issue have maturities spread over several dates. For instance, one-fourth of the bonds may mature on 2011 December 31, another one-fourth on 2012 December 31, and so on.
Callable bonds
These contain a provision that gives the issuer the right to call (buy back) the bond before its maturity date, similar to the call provision of some preferred stocks. A company is likely to exercise this call right when its outstanding bonds bear interest at a much higher rate than the company would have to pay if it issued new but similar bonds. The exercise of the call provision normally requires the company to pay the bondholder a call premium of about USD 30 to USD 70 per USD 1,000 bond. A call premium is the price paid in excess of face value that the issuer of bonds must pay to redeem (call) bonds before their maturity date.
Convertible bonds
A convertible bond may be exchanged for shares of stock of the issuing corporation at the bondholder's option. These bonds have a stipulated conversion rate of some number of shares for each USD 1,000 bond. Although any type of bond may be convertible, issuers add this feature to make risky debenture bonds more attractive to investors.
Bonds with stock warrants
A stock warrant allows the bondholder to purchase shares of common stock at a fixed price for a stated period. Warrants issued with long-term debt may be nondetachable or detachable. A bond with nondetachable warrants is virtually the same as a convertible bond; the holder must surrender the bond to acquire the common stock. Detachable warrants allow bondholders to keep their bonds and still purchase shares of stock through exercise of the warrants.
Junk bonds (High-yield bonds)
These are high-interest rate, high-risk bonds. Many junk bonds issued in the 1980s financed corporate restructurings. These restructurings took the form of management buyouts (called leveraged buyouts or LBOs), and hostile or friendly takeovers of companies by outside parties. By early 1990s, junk bonds lost favor as many issuers defaulted on their interest payments. Some issuers declared bankruptcy or sought relief from the bondholders by negotiating new debt terms.
Fixed rate bonds
These have a coupon that remains constant throughout the life of the bond. A variation is stepped-coupon bonds, whose coupon increases during the life of the bond.
Floating rate notes
Also known as FRNs or floaters, these have a variable coupon that is linked to a reference rate of interest, such as LIBOR or Euribor.
Zero-coupon bonds
Zeros pay no regular interest. They are issued at a substantial discount to par value, so that the interest is effectively rolled up to maturity (and usually taxed as such). The bondholder receives the full principal amount on the redemption date.
Exchangeable bonds
These allow for exchange to shares of a corporation other than the issuer.
War bond
These are issued by a country to fund a war.
Municipal bond
These are bonds issued by a state, U.S. Territory, city, local government, or their agencies. Interest income received by holders of municipal bonds is often exempt from the federal tax and the issuing state's income tax. Some municipal bonds issued for certain purposes may not be tax exempt.
Treasury bond
Also called a government bond, this is issued by the Federal government and is not exposed to default risk. It is characterized as the safest bond, with the lowest interest rate. Backed by the "full faith and credit" of the federal government, this type of bond is often referred to as risk-free.