Types of Bonds

Types of Bonds

Government Bonds

• Issued by governments to finance their activities
• Considered to be very low-risk investments
• Examples:
  • U.S. Treasury bonds (T-bonds)
  • German bunds
  • Japanese government bonds

Corporate Bonds

• Issued by companies to raise capital for various purposes
• Carry a higher level of risk compared to government bonds
• Can offer higher returns to compensate for the increased risk
• Examples:
  • High-yield bonds (junk bonds)
  • Investment-grade bonds

Municipal Bonds

• Issued by local governments, cities, or states to finance infrastructure projects
• Interest earned is often exempt from federal income tax and state taxes
• Examples:
  • General obligation bonds
  • Revenue bonds

International Bonds

• Issued by governments or companies in foreign markets
• Can be denominated in a foreign currency
• Examples:
  • Eurobonds
  • Samurai bonds (issued in Japan)
  • Yankee bonds (issued in the US by foreign entities)

High-Yield Bonds

• Issued by companies with lower credit ratings
• Offer higher yields to compensate for the increased credit risk
• Also known as "junk bonds"

Convertible Bonds

• Can be converted into a predetermined number of shares of the issuer's common stock
• Offer a lower yield compared to traditional bonds
• Provide the potential for capital appreciation

Zero-Coupon Bonds

• Do not make regular interest payments
• Sold at a discount to their face value
• Redeemed at face value at maturity
• Examples:
  • U.S. Treasury bills
  • Commercial paper

Government Bonds

• Issued by governments to finance their activities
• Considered to be very low-risk investments
• Examples include U.S. Treasury bonds (T-bonds), German bunds, and Japanese government bonds

Corporate Bonds

• Issued by companies to raise capital for various purposes
• Carry a higher level of risk compared to government bonds
• Can offer higher returns to compensate for the increased risk
• Include high-yield bonds (junk bonds) and investment-grade bonds

Municipal Bonds

• Issued by local governments, cities, or states to finance infrastructure projects
• Interest earned is often exempt from federal income tax and state taxes
• Examples include general obligation bonds and revenue bonds

International Bonds

• Issued by governments or companies in foreign markets
• Can be denominated in a foreign currency
• Examples include Eurobonds, Samurai bonds (issued in Japan), and Yankee bonds (issued in the US by foreign entities)

High-Yield Bonds

• Issued by companies with lower credit ratings
• Offer higher yields to compensate for the increased credit risk
• Also known as "junk bonds"

Convertible Bonds

• Can be converted into a predetermined number of shares of the issuer's common stock
• Offer a lower yield compared to traditional bonds
• Provide the potential for capital appreciation

Zero-Coupon Bonds

• Do not make regular interest payments
• Sold at a discount to their face value
• Redeemed at face value at maturity
• Examples include U.S. Treasury bills and commercial paper

Types of Bonds

• Government bonds are issued by governments to finance their activities, such as U.S. Treasury bonds.
• Corporate bonds are issued by companies to raise capital, such as Apple bonds.
• Municipal bonds are issued by local governments and municipalities to finance infrastructure projects.
• High-yield bonds are issued by companies with lower credit ratings, offering higher yields to compensate for higher default risk.
• International bonds are issued by governments or companies in foreign currencies, such as Eurobonds.
• Convertible bonds can be converted into a predetermined number of shares of the issuer's common stock.
• Zero-coupon bonds do not make regular interest payments, instead offering a lump sum at maturity.

Bond Yields

• Coupon yield is the annual interest rate paid by the bond issuer, expressed as a percentage.
• Current yield is the total return on investment, including coupon payments and capital gains or losses.
• Yield to maturity is the total return on investment if the bond is held until maturity.
• The yield curve is a graph showing the relationship between bond yields and their maturities.

Credit Rating

• Credit rating agencies, such as Moody's and Standard & Poor's, assess the creditworthiness of bond issuers.
• Credit ratings are scores assigned to bond issuers, indicating their likelihood of default, ranging from AAA (highest) to D (lowest).
• Investment grade bonds have high credit ratings, considered low-risk investments.
• Junk bonds have low credit ratings, considered high-risk investments.

Bond Duration

• Duration is a measure of a bond's sensitivity to changes in interest rates.
• Macaulay duration is the weighted average of the times until each cash flow is received.
• Modified duration is a measure of duration that takes into account the bond's yield.
• Convexity is a measure of the curvature of the bond's price-yield relationship.

Government Bonds

• Treasury bonds are issued by national governments, such as U.S. Treasury bonds.
• Gilts are issued by the UK government.
• Bunds are issued by the German government.
• Government bond yields are used as a benchmark for other bonds, such as the 10-year Treasury yield.
• Central banks often purchase government bonds as part of monetary policy, such as quantitative easing.