Not every corporate bond is a traditional bond paying a fixed income at a fixed time interval before turning to money at precise maturity date. However, the bonds’ structure can differ in coupon intervals, coupon type, convertibility, redeemability, and a lot of other benefits. Below are the most important types of differences:
Floating rate note (FRN)
An (FRN) Floating Rate Note is a bond having a variable coupon; interest payments are dependent on changing interest rates, like EURIBOR, which are castoffs as a reference rate at intermittently refix dates.
Generally, the interest payment is a fixed put on over a six-month or three-month reference rate. At the start of coupon time, the spread adds up to reference to calculate the coupon on a specific date. With the margin or spread rates being constant, the reference rate is flexible. Some special FRNs have minimum or maximum coupons known as floored and capped FRNs.
Index-linked bonds
Like a floating rate note, index-linked bonds offer different coupons dependent on a primary index like the customer price index or stock index, or commodity price index. The paid coupon is a set goal rising above the reference index.
Zero-coupon bonds
As the name says, there are no coupons in zero-coupon bonds. The return is acquired for the investor by selling the bond at a substantial discount to the bond’s nominal value, which is because of the fixed maturity period.
The cash flows taking part in the life of a zero-coupon bond are the buying price and repaying the principal at maturity. Having no interest payments, the investor isn’t at any reinvestment risk, making it bearable for the investors to accept a bit lower return on investment.
Strips
When it gets stripped of its cash flows, a bond means every single coupon payment and principal amount payment can be separated and sold as single zero-coupon bonds. Strips, short form for ‘Separate Trading of Registered Interest and Principal Securities,’ narrates the demolition of interest coupons compared to paper securities.
Perpetual bonds
A perpetual bond doesn’t carry any maturity or redemption date and can only be converted to money if the issuer faces liquidation. Meaning that the perpetual bonds give unlimited coupons, interest is fixed for the starting period or a bond’s life. Perpetual bonds carry a call option, but in many cases, such an option can only be availed after ten or more years. A lot of perpetual bonds are given by financial institutes.
Convertible bonds
Few corporate bonds give the option of converting the bond into a definite number of shares at any time before approaching its maturity period date. Such type of convertible bonds might be attractive to investors as the rise in shared prices increases the bond value. This gives the issuer a decrease in the interest rate and lessens the costs of a non-convertible bond.
Collateralization
A lot of corporate bonds are unsecured bonds known as debentures. Compared to the secured bonds, which are supported by collateral, debentures are only supported by the issuer’s general credit and its tendency to produce enough cash to pay principal amount and interest.
Subordinate debentures have a lower priority even to secured bonds or debentures when it is time to claim the issuer’s assets at the time of bankruptcy. Credit ratings are the tool to determine the default risk of the issuer compared to unsecured bonds.
Asset-backed securities (ABS)
Compared to a straightforward bond, where an investor depends on the issuer’s overall creditworthiness to repay principal and interest, ABS has a pool of assets as a backup. The assets pool will build an essential cash flow to facilitate investors’ associated payments and work as collateral. The assets are pooled to make them more secure economically and expand the underlying assets’ quality. ABS gives companies the flexibility to raise funds and build new capital resources by burrowing in place of assets.
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