What are the different types of bonds?

Here, we will focus on the types and categories of bonds that exist, with a specific focus on the Australian Stock Exchange (ASX). This may vary slightly by country, and you should be able to find the information on your local stock exchange website.

Bonds can be categorised through the interest that they pay or through the issuer.

Types of interest

The different types of bonds based on the interest are as follows: [1]

1. Fixed-rate bonds: Pay a fixed rate of interest for the life of the bond. The bond will carry the interest rate and credit risk, mostly government-issued.
2. Floating rate bonds: These bonds provide interest payments that are tied to some measure of current interest rates – usually this will be the 90-day bank bill swap rate plus a fixed margin. Unlike fixed-rate bonds, the major risk with them is credit quality. These are typically issued by corporates.
3. Indexed bonds: These are medium- to long-term bonds, and the face value is adjusted at a point in time for movements in the Consumer Price Index (CPI) or the particular index to which the commodity is tied to.

Bond categories

The bond categories based on the type of issuer are as follows: [1]

1. Government bonds: These are considered to have a low credit risk and may be suitable for investors who are looking for secure cash flows. Given that they have low risk, they’ll typically have a lower yield as well.
2. Corporate bonds: These are obviously offered by corporations and will have different levels of creditworthiness, depending on the organisation that offers them. It is therefore important to read the term sheet and prospectus to ascertain this information.

Others

Some of the other ways bonds can be issued are:

• Credit quality
• Original maturity
• Currency and geographic
• Indexing status
• Taxable status

References

_{1. Understanding bonds [PDF]. ASX. Available from: https://www.asx.com.au/documents/products/Understanding_Bonds-_AGB_web_version.pdf}