Principal Features of a Bond

Maturity and Terms to Maturity Coupon Principal

e.g. CG12.00% 2008 12.00% - Coupon 2008 The bond matures in 2008 and in 2006 the term to maturity is 2 years

Classification of Bonds based on Maturity Short Term Bonds

Bonds with term to maturity of 1-4 years

Medium Term Bonds

Bonds with term to maturity of 5-10 years

Long Term Bonds

Bonds with term to maturity greater than 10 years

Types of Fixed Income Securities

Zero Coupon Bonds

Issued at a discount No interest is paid Redemption of the bond is at par value

Deep Discount Bond

When the bond is issued for a long period, the issue price is at a steep discount to the redemption value.

Types of Fixed Income Securities

Accrual Bond
The interest is not paid regularly The interest is accumulated and paid at the maturity of the bond.

Step-up Bond
Coupon Rate increases over a period of time. The interest cost is lower in the initial period and increases over a period of time

Types of Fixed Income Securities

Deferred Interest Bond

The bonds have a coupon, but the borrower defer the coupon payment for some period (say initial 3 to 7 years) At the end of the above period the lump sum interest is paid

Floating Rate Securities

Bonds for which the coupon interest payment vary over the life of the bond, based on a specific interest rate or index

Procedure for setting the coupon rate Reference Rate +/- Quoted Margin

Floating Rate Securities

Cap
The upper limit, put a maximum on the interest rate to be paid by the borrower

Floor
The lower limit, put a minimum on the periodic interest payment received by the investor. Floating rate bonds whose coupon are bound by a cap and floor are called Range Notes.

Inverse Floating Rate Instruments Bonds for which the coupon interest payment vary over the life of the bond, based on a specific interest rate or index. Procedure for setting the coupon rate
Fixed Rate Reference Rate.

Callable Bonds
Bonds that allow the issuer to repay the bond prior to the maturity of the bond is called callable bonds
(these are also called embedded option)

If the interest rate falls, the call option gives the issuer the right to redeem the bond and reissue the bond at the lower rate Callable bonds trade at a discount as compared to non-callable bonds

Putable Bonds
Bonds that provide the investor the right to seek redemption, prior to the maturity of the bond are called putable bonds If the interest rate increase, the investor has the right to sell the lower coupon paying bond and invest in higher coupon bond Putable bonds trade at a premium as compared to non-putable bonds