An Insight into Bonds and their Dynamics

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In this blog, we would attempt to enable our readers to become well versed with the concept of Bonds.

Bonds are those financial instruments which are utilized by the organizations for raising the required amount of financial capital. The concerned organization uses it as a financial contract wherein it assures the lenders to make the payment of both the principal and the interest amount on maturity date. However, not all the bonds do not accrue the interest to the investor.

Bonds can be classified into various types. They can basically be differentiated on the basis of multiple parameters including the anticipated interest rates and the maturity period.

Let’s understand about the different types of bonds available in the market-

  • Fixed Rate Bonds- The rate of interest of these bonds is constant. They do not get affected by the fluctuations in the market rate.
  • Floating Rate Bonds- The interest rate of these bonds vary as per the existing market rate. Therefore, it is influenced by the dynamic market situation.
  • Zero Interest Rate Bonds- They can be enumerated amongst the category of such bonds which do not yield any interest to the investors and they provide only the principal amount to the bond holders.
  • Inflation Linked Bonds- The rate of interest provided in these bonds is lesser than that of the fixed rate bonds and therefore it is less profitable.
  • Perpetual Bonds- They are a special type of bonds that do not have any fixed maturity date. The holders of these bonds receive the interest constantly without the termination of the financial contract.
  • Subordinated Bonds- Such bonds justify their nomenclature as they are given lesser priority in comparison to other categories of bonds. This holds true in case of liquidation of the organization.
  • Bearer Bonds- They are not so reliable instruments as they do not contain name of the holder which makes the owner all the more vulnerable to the threat of theft.
  • War Bonds- They are issued by the government in case of war situation in order to raise considerable amount of monetary capital.
  • Serial Bonds- The bonds which mature at different time intervals in installments are known as Serial Bonds.
  • Climate Bonds- They are issued by the government in order to effectively tackle the exigencies due to climate related adversity by raising the finances for the same.

After becoming familiar with the defining characteristics and diverse categories of bonds, the knowledge of our readers would definitely remain incomplete without understanding certain mechanisms through which Bond Performance can be adjudged.

In order to make the task easier for our readers, we are sharing a brief list of the key factors that have an implication on the Bond Performance-

  • Price of the Bond
  • Expected Rate of Interest
  • Maturity Period of the Bond- If a bond has a longer maturity, it leads to greater interest rate risk.
  • Norms during Redemption of the Bond- A special provision that allows the issuer to redeem the bond at a specific price before the maturity date is called Call Provision. It provides higher rate of interest to the bond holder.

We hope our blog would serve as a useful source of information for our curious readers.

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