Banking and Financial awareness is very important from exam point of view as questions are come from this section as well as it is very important from interview point of view because a banking aspirant is expected to have banking and financial awareness knowledge. In this space we will be talking about Bonds and their types. This is a very important topic and we will be discussing it in detail here so make sure you read this article thoroughly as the explanation is in very lucid language so that every student who is not from commerce background can understand it.
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What Are BONDS?
Every individual puts a part of his/her salary into something that would help him/her in the long run, this is known as “investment”. Investment is quite essential because unavoidable circumstances can arise anytime and anywhere. People like to invest their money into something which guarantees maximum return and minimum risks. There are different ways in which one can invest money and one such way is to invest in bonds. Bonds are commonly referred to as fixed income securities and are one of three classes individual investors are usually familiar with, along with stocks and cash equivalents.
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Bonds are basically issued by organizations for a period of more than one year to raise money by borrowing and to do so organizations issue bonds to investors which is more of a financial contract. In this type of contract, the organization promises to pay the principal amount and interest (in the form of coupons) to the holder of the bond after a certain date. (Also called maturity date.)
Types of Bonds
Given below are the types of bonds:
1) Fixed Rate Bonds
In this the interest remains fixed throughout the tenure which makes it resistant to any changes and fluctuations in the market.
2) Floating Rate Bonds
In Floating rate bonds, the interest rate is not fixed and it keeps on fluctuating as per the current market reference rate.
3) Zero Interest Rate Bonds
In Zero Interest Rate Bonds any regular interest is not paid to the investor and issuers only pay the principal amount to the bond holders.
4) Inflation Linked Bonds
Inflation Linked Bonds are those bonds that are linked to Bonds. The interest rate raised on Inflation linked bonds is generally lower than fixed rate bonds.
5) Perpetual Bonds
The bonds which have no maturity dates are called perpetual bonds and the holders of perpetual bonds enjoy interest throughout.
6) Subordinated Bonds
The Bonds which are at the bottom of the priority table compared to other bonds of the company in case there is a lockdown are called subordinated bonds. If we consider the case of liquidation then subordinated bonds are given less importance as compared to senior bonds which are paid first.
7) Bearer Bonds
Bearer Bonds do not carry the name of the bond holder and anyone who possesses the bond certificate can claim the amount. If the bond certificate gets stolen or misplaced by the bond holder, anyone else with the paper can claim the bond amount.
8) War Bonds
The bonds issued by any government in case of a war are known as war bonds.
9) Serial Bonds
Bonds that mature over a period of time in instalments are known as serial bonds.
10) Climate Bonds
The bonds issued by any government to raise funds when the country faces any adverse changes in climatic conditions are known as climatic bonds.
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