1. Straight Bonds: These bonds provide for a fixed coupon rate for the entire duration
of the bond. Generally, such interest is paid on half yearly basis. Such bonds also
have long maturity periods and provide for repayment of the principle in full only on
maturity. Such pattern of repayment is called ‘bullet’ repayment. Normally issuers
with good credit rating issue these bonds.
2. Sinking Fund Bonds: These bonds provide for repayment of the principal in
instalments during the lifetime of the bond. Such bonds are issued by companies with
average credit rating. The repayment in instalments assures the investors about the
solvency and credit-worthiness of the issuer. It also helps to progressively reduce the
interest liability of the issuer.
3. Bonds with Options: These bonds provide an option for pre-payment either to the
issuer or to the investor. Such bonds can be of 2 types:
a. Bonds with Call Option
b. Bonds with Put Option
Bonds with Call Option allow the issuer to repay the principal on a specified date
before maturity. Such bonds normally carry an above normal coupon rate. Such
bonds are issued when the issuer anticipates a substantial reduction in interest rates.
Investors desire Bonds with Put Option when they are anticipating an increase in the
interest rates. The Put Option entitles them to obtain early payment of the principle
on a specified date before maturity. Such bonds normally carry a below normal
coupon rate.


4. Floating Rate Bonds: Bonds which are issued with a variable coupon rate are called
floating rate bonds. Such bonds provide for a periodic revision in the interest rate.
This revision is based on a specified benchmark rate. In most countries, the 6 months
Treasury bill rate operates as a benchmark for such revisions.
5. Collared Bonds: Floating rate bonds sometimes provide for either a ceiling or a floor
rate of interest. The ceiling rate protects the issuer since it signifies the maximum
liability whereas the floor rate protects the investor since it signifies the minimum
return. Bonds which provide for both ceiling and floor rates of interest are called
Collared Bonds.
6. Junk Bonds: Companies with very poor credit rating or entering into high risk
business ventures issue such bonds. These bonds carry coupon rates at-least 3 – 4%
above the normal rates. A characteristic feature of these bonds is the high turnover of
investors. Such bonds are used by corporate entities and individuals to make short
term gains on temporary surplus liquidity.
7. Zero Coupon Bonds: Zero Coupon Bonds do not carry any interest rate and are
issued at a discount to face value whereas the redemption takes place on maturity at
face value. The difference between the issue price and the redemption price provides
the return to the investor by way of capital gains.
8. Deep Discount Bonds: These bonds are also issued at a discount to face value and
redeemed at face value on maturity. The difference between the issue price and the
redemption price represents cumulative interest at a specified rate of interest. This
difference therefore represents interest income to the investor unlike in Zero Coupon
Bonds where it represents capital gains.

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