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All You Need to Know about Bonds

ArticleID 114  
Writer Isaac Thuku
Category Personal Article



They are typically securities issued by a corporation or governmental body for specified term. Bonds are due for payment at maturity, when the face value of bond is returned to the investors. They usually pay fixed periodic interest installments called coupon payments. Some bonds pay variable income. When an investor buys bonds, they become creditors of the issuer. The buyer does not gain any kind of owner ship rights to the issuer, unlike the case with equity securities.

Advantages of bonds for an investor:

• They are a good source of current income

• Investment in bonds is relatively safe from large losses

• In case of default, bondholders receive their payments before shareholders can be compensated.

Disadvantages of bonds

• Potential profit from investment in bonds is limited.


Currently in the financial markets there are a lot of various types of bonds.Investors must understand their differences and features before deciding what bonds would be suitable for his/ her investment portfolio. Bonds are classified according to their key features;


• Non interest bearing bonds - bonds issued at a discount. No interest is earned in the bond’s life, but it is redeemed for face value at maturity.

• Regular serial bonds – These are serial bonds in which all periodic installments of principal repayment are equal in amount.

• Deferred –interest bonds –bonds that pay interest at a later date.

• Income bonds – bonds on which interest is paid only when earned by the issuing firm;

• Indexed bonds - bonds where the values of principal and the payout rise with inflation or the value of the underlying commodity;

• Optional payment bonds – bonds that give the holder the choice to receive payment on interest or principal or both in the currency of one or more foreign countries, as well as in domestic currency. • Coupon bonds – bonds with interest coupons attached.

• Zero-coupon bonds – bonds sold at a deep discount from its face value and redeemed at maturity for full face value. The difference between the cost of the bond and its value when redeemed is the investor’s return. These securities provide no interest payments to holders.

• Full coupon bonds – bonds with a coupon rate near or above current market interest rate;


All You Need to Know about Bonds
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