{"id":4021,"date":"2020-10-24T16:02:01","date_gmt":"2020-10-24T16:02:01","guid":{"rendered":"https:\/\/courses.lumenlearning.com\/wm-financialaccounting\/?post_type=chapter&#038;p=4021"},"modified":"2020-11-30T20:50:06","modified_gmt":"2020-11-30T20:50:06","slug":"types-of-bonds","status":"publish","type":"chapter","link":"https:\/\/courses.lumenlearning.com\/suny-clinton-financialaccounting\/chapter\/types-of-bonds\/","title":{"raw":"Types of Bonds","rendered":"Types of Bonds"},"content":{"raw":"<div class=\"textbox learning-objectives\">\r\n<h3>Learning Outcomes<\/h3>\r\n<ul>\r\n \t<li style=\"font-weight: 400;\">Describe various types of bonds<\/li>\r\n<\/ul>\r\n<\/div>\r\nDebt financing has a language of its own, so before we delve into the types of bonds, let\u2019s review some financial terms related to bonds.\r\n\r\n<strong>Issuer:\u00a0<\/strong>The entities that borrow money by issuing bonds which include the government, government agencies, municipal bodies, and corporations.\r\n\r\n<strong>Face Value:\u00a0<\/strong>The principal amount that is returned on maturity. As you will see, this is not always the amount of the proceeds that the issuer receives.\r\n\r\n<strong><a href=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5107\/2020\/10\/02222130\/coupon-5219531_1920.jpg\"><img class=\"size-medium wp-image-4963 alignright\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5107\/2020\/10\/02222130\/coupon-5219531_1920-300x200.jpg\" alt=\"The words &quot;coupon code&quot; on the screen of a smartphone.\" width=\"300\" height=\"200\" \/><\/a>Coupon:<\/strong> The rate of interest paid on the bond. Bonds used to be printed on paper and the holder would redeem a coupon in order to get paid.\r\n\r\n<strong>Rating:<\/strong> Every bond is usually rated by credit rating agencies. A higher credit rating usually results in a lower coupon rate.\r\n\r\n<strong>Coupon payment frequency:<\/strong> The coupon (interest) payments on the bond usually have a payment frequency. The coupons are usually paid annually or semi-annually; however, they may be paid quarterly or monthly as well.\r\n\r\n<strong>Yield:\u00a0<\/strong>The effective return the investor makes on the bond is called the yield. If you buy a bond for $1000 with a 10% coupon that pays semi-annually, you get $50 every six months in interest and the yield is 10%. However, if market rates are different than the coupon rate, you may pay more or less than the face value of $1000 for the bond in order to get a yield that is the equivalent to the market rate. We\u2019ll cover this later.\r\n\r\n<strong><img class=\"alignright wp-image-4965 size-medium\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5107\/2020\/10\/02222317\/historical-stock-5100671_1920-300x200.jpg\" alt=\"A collection of stock and bond bank notes.\" width=\"300\" height=\"200\" \/>Different types of bonds:\u00a0<\/strong>The simplest bond has a fixed interest rate and a defined maturity and is usually issued and redeemed at the face value. It is also known as a straight bond or a bullet bond or even a plain vanilla bond.\r\n\r\n<strong>Zero coupon bonds:<\/strong> A zero coupon bond is a type of bond where there are no coupon payments made. It is not that there is no yield; the zero coupon bonds are issued at a price lower than the face value (say $950) and then pay the face value on maturity ($1000). The difference will be the yield for the investor.\r\n\r\n<strong>Convertible bonds:<\/strong> Convertible bonds are a special variety of bonds that can be converted to equity shares at a specified time at a pre-set conversion price. These kinds of bonds are often used in start-up financing by investors who want the initial security of debt but who might later want to buy into the company as shareholders.\r\n\r\n<strong>Callable bonds:\u00a0<\/strong>Bonds that are issued with a specific feature where the issuer has the right to buy back the bonds at a pre-agreed price and a pre-fixed date are callable bonds. Since these bonds allow a benefit to the issuer to repay off the liability before maturity, these bonds usually offer a coupon rate higher than a normal straight coupon-bearing bond.\r\n\r\n<strong>Puttable bonds:\u00a0<\/strong>Bonds are issued with a specific feature where the bondholder has the right to sell back the bonds at a pre-fixed date before maturity are puttable bonds. Since these bonds allow a benefit to the bondholders to ask for the principal repayment before maturity, these bonds usually offer a coupon rate lower than a normal straight coupon-bearing bond.\r\n\r\n<strong>Serial bonds:\u00a0<\/strong>A serial bond is a bond issue structured so that a portion of the outstanding bonds mature at regular intervals until all of the bonds have matured. Because the bonds mature gradually over a period of years, these bonds are used to finance projects that provide a consistent income stream for bond repayment.\r\n\r\nIn addition, bonds, like notes payable, could be secured or unsecured, and there is a specific class of high-risk, high-yield bonds called junk bonds that are usually unsecured and likely to not be repaid, hence the high yield.\r\n<div class=\"textbox tryit\">\r\n<h3>PRACTICE QUESTION<\/h3>\r\nhttps:\/\/assessments.lumenlearning.com\/assessments\/23813\r\n\r\n<\/div>","rendered":"<div class=\"textbox learning-objectives\">\n<h3>Learning Outcomes<\/h3>\n<ul>\n<li style=\"font-weight: 400;\">Describe various types of bonds<\/li>\n<\/ul>\n<\/div>\n<p>Debt financing has a language of its own, so before we delve into the types of bonds, let\u2019s review some financial terms related to bonds.<\/p>\n<p><strong>Issuer:\u00a0<\/strong>The entities that borrow money by issuing bonds which include the government, government agencies, municipal bodies, and corporations.<\/p>\n<p><strong>Face Value:\u00a0<\/strong>The principal amount that is returned on maturity. As you will see, this is not always the amount of the proceeds that the issuer receives.<\/p>\n<p><strong><a href=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5107\/2020\/10\/02222130\/coupon-5219531_1920.jpg\"><img loading=\"lazy\" decoding=\"async\" class=\"size-medium wp-image-4963 alignright\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5107\/2020\/10\/02222130\/coupon-5219531_1920-300x200.jpg\" alt=\"The words &quot;coupon code&quot; on the screen of a smartphone.\" width=\"300\" height=\"200\" \/><\/a>Coupon:<\/strong> The rate of interest paid on the bond. Bonds used to be printed on paper and the holder would redeem a coupon in order to get paid.<\/p>\n<p><strong>Rating:<\/strong> Every bond is usually rated by credit rating agencies. A higher credit rating usually results in a lower coupon rate.<\/p>\n<p><strong>Coupon payment frequency:<\/strong> The coupon (interest) payments on the bond usually have a payment frequency. The coupons are usually paid annually or semi-annually; however, they may be paid quarterly or monthly as well.<\/p>\n<p><strong>Yield:\u00a0<\/strong>The effective return the investor makes on the bond is called the yield. If you buy a bond for $1000 with a 10% coupon that pays semi-annually, you get $50 every six months in interest and the yield is 10%. However, if market rates are different than the coupon rate, you may pay more or less than the face value of $1000 for the bond in order to get a yield that is the equivalent to the market rate. We\u2019ll cover this later.<\/p>\n<p><strong><img loading=\"lazy\" decoding=\"async\" class=\"alignright wp-image-4965 size-medium\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5107\/2020\/10\/02222317\/historical-stock-5100671_1920-300x200.jpg\" alt=\"A collection of stock and bond bank notes.\" width=\"300\" height=\"200\" \/>Different types of bonds:\u00a0<\/strong>The simplest bond has a fixed interest rate and a defined maturity and is usually issued and redeemed at the face value. It is also known as a straight bond or a bullet bond or even a plain vanilla bond.<\/p>\n<p><strong>Zero coupon bonds:<\/strong> A zero coupon bond is a type of bond where there are no coupon payments made. It is not that there is no yield; the zero coupon bonds are issued at a price lower than the face value (say $950) and then pay the face value on maturity ($1000). The difference will be the yield for the investor.<\/p>\n<p><strong>Convertible bonds:<\/strong> Convertible bonds are a special variety of bonds that can be converted to equity shares at a specified time at a pre-set conversion price. These kinds of bonds are often used in start-up financing by investors who want the initial security of debt but who might later want to buy into the company as shareholders.<\/p>\n<p><strong>Callable bonds:\u00a0<\/strong>Bonds that are issued with a specific feature where the issuer has the right to buy back the bonds at a pre-agreed price and a pre-fixed date are callable bonds. Since these bonds allow a benefit to the issuer to repay off the liability before maturity, these bonds usually offer a coupon rate higher than a normal straight coupon-bearing bond.<\/p>\n<p><strong>Puttable bonds:\u00a0<\/strong>Bonds are issued with a specific feature where the bondholder has the right to sell back the bonds at a pre-fixed date before maturity are puttable bonds. Since these bonds allow a benefit to the bondholders to ask for the principal repayment before maturity, these bonds usually offer a coupon rate lower than a normal straight coupon-bearing bond.<\/p>\n<p><strong>Serial bonds:\u00a0<\/strong>A serial bond is a bond issue structured so that a portion of the outstanding bonds mature at regular intervals until all of the bonds have matured. Because the bonds mature gradually over a period of years, these bonds are used to finance projects that provide a consistent income stream for bond repayment.<\/p>\n<p>In addition, bonds, like notes payable, could be secured or unsecured, and there is a specific class of high-risk, high-yield bonds called junk bonds that are usually unsecured and likely to not be repaid, hence the high yield.<\/p>\n<div class=\"textbox tryit\">\n<h3>PRACTICE QUESTION<\/h3>\n<p>\t<iframe id=\"lumen_assessment_23813\" class=\"resizable\" src=\"https:\/\/assessments.lumenlearning.com\/assessments\/load?assessment_id=23813&#38;embed=1&#38;external_user_id=&#38;external_context_id=&#38;iframe_resize_id=lumen_assessment_23813\" frameborder=\"0\" style=\"border:none;width:100%;height:100%;min-height:400px;\"><br \/>\n\t<\/iframe><\/p>\n<\/div>\n\n\t\t\t <section class=\"citations-section\" role=\"contentinfo\">\n\t\t\t <h3>Candela Citations<\/h3>\n\t\t\t\t\t <div>\n\t\t\t\t\t\t <div id=\"citation-list-4021\">\n\t\t\t\t\t\t\t <div class=\"licensing\"><div class=\"license-attribution-dropdown-subheading\">CC licensed content, Original<\/div><ul class=\"citation-list\"><li>Types of Bonds. <strong>Authored by<\/strong>: Joseph Cooke. <strong>Provided by<\/strong>: Lumen Learning. <strong>License<\/strong>: <em><a target=\"_blank\" rel=\"license\" href=\"https:\/\/creativecommons.org\/licenses\/by\/4.0\/\">CC BY: Attribution<\/a><\/em><\/li><\/ul><div class=\"license-attribution-dropdown-subheading\">CC licensed content, Shared previously<\/div><ul class=\"citation-list\"><li><strong>Authored by<\/strong>: Markus Winkler. <strong>Located at<\/strong>: <a target=\"_blank\" href=\"https:\/\/pixabay.com\/photos\/coupon-code-discount-sale-business-5219531\/\">https:\/\/pixabay.com\/photos\/coupon-code-discount-sale-business-5219531\/<\/a>. <strong>License<\/strong>: <em><a target=\"_blank\" rel=\"license\" href=\"https:\/\/creativecommons.org\/about\/cc0\">CC0: No Rights Reserved<\/a><\/em>. <strong>License Terms<\/strong>: https:\/\/pixabay.com\/service\/terms\/#license<\/li><li><strong>Authored by<\/strong>: pictavio. <strong>Located at<\/strong>: <a target=\"_blank\" href=\"https:\/\/pixabay.com\/photos\/historical-stock-securities-5100671\/\">https:\/\/pixabay.com\/photos\/historical-stock-securities-5100671\/<\/a>. <strong>License<\/strong>: <em><a target=\"_blank\" rel=\"license\" href=\"https:\/\/creativecommons.org\/about\/cc0\">CC0: No Rights Reserved<\/a><\/em>. <strong>License Terms<\/strong>: https:\/\/pixabay.com\/service\/terms\/#license<\/li><\/ul><div class=\"license-attribution-dropdown-subheading\">All rights reserved content<\/div><ul class=\"citation-list\"><li>Types of Bonds. <strong>Authored by<\/strong>: Education Unlocked. <strong>Located at<\/strong>: <a target=\"_blank\" href=\"https:\/\/youtu.be\/Jj0V01Arebk\">https:\/\/youtu.be\/Jj0V01Arebk<\/a>. <strong>License<\/strong>: <em>All Rights Reserved<\/em>. <strong>License Terms<\/strong>: Standard YouTube license<\/li><\/ul><\/div>\n\t\t\t\t\t\t <\/div>\n\t\t\t\t\t <\/div>\n\t\t\t <\/section>","protected":false},"author":90270,"menu_order":7,"template":"","meta":{"_candela_citation":"[{\"type\":\"original\",\"description\":\"Types of Bonds\",\"author\":\"Joseph Cooke\",\"organization\":\"Lumen Learning\",\"url\":\"\",\"project\":\"\",\"license\":\"cc-by\",\"license_terms\":\"\"},{\"type\":\"copyrighted_video\",\"description\":\"Types of Bonds\",\"author\":\"Education Unlocked\",\"organization\":\"\",\"url\":\"https:\/\/youtu.be\/Jj0V01Arebk\",\"project\":\"\",\"license\":\"arr\",\"license_terms\":\"Standard YouTube license\"},{\"type\":\"cc\",\"description\":\"\",\"author\":\"Markus Winkler\",\"organization\":\"\",\"url\":\"https:\/\/pixabay.com\/photos\/coupon-code-discount-sale-business-5219531\/\",\"project\":\"\",\"license\":\"cc0\",\"license_terms\":\"https:\/\/pixabay.com\/service\/terms\/#license\"},{\"type\":\"cc\",\"description\":\"\",\"author\":\"pictavio\",\"organization\":\"\",\"url\":\"https:\/\/pixabay.com\/photos\/historical-stock-securities-5100671\/\",\"project\":\"\",\"license\":\"cc0\",\"license_terms\":\"https:\/\/pixabay.com\/service\/terms\/#license\"}]","CANDELA_OUTCOMES_GUID":"","pb_show_title":"on","pb_short_title":"","pb_subtitle":"","pb_authors":[],"pb_section_license":""},"chapter-type":[],"contributor":[],"license":[],"class_list":["post-4021","chapter","type-chapter","status-publish","hentry"],"part":825,"_links":{"self":[{"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-financialaccounting\/wp-json\/pressbooks\/v2\/chapters\/4021","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-financialaccounting\/wp-json\/pressbooks\/v2\/chapters"}],"about":[{"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-financialaccounting\/wp-json\/wp\/v2\/types\/chapter"}],"author":[{"embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-financialaccounting\/wp-json\/wp\/v2\/users\/90270"}],"version-history":[{"count":7,"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-financialaccounting\/wp-json\/pressbooks\/v2\/chapters\/4021\/revisions"}],"predecessor-version":[{"id":6621,"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-financialaccounting\/wp-json\/pressbooks\/v2\/chapters\/4021\/revisions\/6621"}],"part":[{"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-financialaccounting\/wp-json\/pressbooks\/v2\/parts\/825"}],"metadata":[{"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-financialaccounting\/wp-json\/pressbooks\/v2\/chapters\/4021\/metadata\/"}],"wp:attachment":[{"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-financialaccounting\/wp-json\/wp\/v2\/media?parent=4021"}],"wp:term":[{"taxonomy":"chapter-type","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-financialaccounting\/wp-json\/pressbooks\/v2\/chapter-type?post=4021"},{"taxonomy":"contributor","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-financialaccounting\/wp-json\/wp\/v2\/contributor?post=4021"},{"taxonomy":"license","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-financialaccounting\/wp-json\/wp\/v2\/license?post=4021"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}