Types of Bonds

A bond is a loan from an investor to a borrower, such as a corporation or government. This loan is given for a set period, where the investor receives regular interest. There are many types of bonds. In this article, we will go over 5 types of bonds so you can determine if they would be a good fit for your portfolio.

Zero-Coupon Bonds

A zero-coupon bond is unique because it does not pay periodic interest. This type of bond is sold to you at a deep discount to the face value, but you will receive the full-face value when the bond reaches maturity. This type of bond is often used to plan for a specific long-term financial obligation like paying for college or retirement. This is because they will give you a predictable lump sum on a set date.

Callable Bonds

Callable bonds are debt securities that allow an issuer to buy back bonds from you, as the investor, before they hit their maturity date. If market rates start to drop, it allows the issuer to call back the old bonds with higher rates and issue new ones with lower interest rates. This helps the company save on interest. With these types of bonds, you typically receive a higher interest rate, but you face reinvestment risk. This is because the principal you have to reinvest might be made at lower market rates.

Inflation Linked Bonds

An inflation linked bond is a special security designed to help hedge against the impacts of inflation. This is done by linking your principal and interest payments to an inflation index such as the Consumer Price Index. You are guaranteed a return adjusted for inflation if you hold the bond until maturity. These bonds come with a deflation floor. This ensures you receive at least the original principal amount upon maturity.

Convertible Bonds

One of the types of bonds are convertible bonds. These types of bonds allow you to exchange the bond for a predetermined number of common shares in the issuing company. They do pay interest. But it will be at a lower rate than their non-convertible counterparts. If you choose not to convert you will receive the principal amount back at maturity. If the issue company’s stock prices rise above the conversion price, the value of the bond will increase.

Floating Rate Bonds

A floating rate bond provides interest payments that adjust periodically based on the performance of a benchmark rate. It helps increase profits in a rising rate environment. But the downside is you may end up with lower yields when rates fall. The rate will reset at predetermined intervals such as annually or quarterly.

Choosing Your Types of Bonds

Now that you are aware of some of the types of bonds available to you, it is time to implement them into your portfolio. Meet with a Registered Investment Advisor who can help you balance your portfolio based on your needs.

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