types of bonds FIN 3309

6.4

government bonds: treasury issues

• original maturities ranging from 2-10 years (note)

• 30 years or more (bonds)

• have no default risk

• exempt from state income taxes (taxed at the federal level)

• highly liquid

government bonds: municipal notes

• state and local government also borrow money by selling

• varying degrees of default risk

• rated much like corporate issues

• coupons are exempt from federal income taxes

• yields are much lower than yields on taxable bonds

• almost always callable

zero coupn bonds

• bond that pays no coupons at all must be offered at a price that is much lower than its stated value (discount)

• deducts interest very year even though no interest is actually paid

• owner must pay taxes on interest accrued every year

• some bonds could be this for part of their lives

• attractive for tax-exempt investors with long-term dollar-denomination liabilites

floating rate bonds

• coupon payments are adjustable

• tied to an interest rate index

• depends on exactly how the coupon payment adjustments are defined

• holder has the right to redeem the note at par on the coupon payment date after some specified amount of time

• coupon rate has a floor and a ceiling

floating-rate bond: inflation linked bond

• have coupons adjusted according to the rate of inflation

structured notes

• bonds that are based on stocks, bonds, commodities, or currencies

convertible bond

• can be swapped for a fixed number of shares of stock anytime before maturity at the holder’s option

put bond

• allows the holder to force the issuer to buy the bond back at a stated price

CoCo bonds and NoNo bonds

• have a coupon payment

• zero coupon payment

Sukuk bonds

• worldwide demand for assets that comply with sharia or islamic law

• does not permit charging interest

• cannot buy or issue conventional bonds