Types of Bonds - Basics of Bond, General Features and Characteristics (2024)

Types of Bonds is an important topic with regard to Banking Awareness and the General Awareness part of the various Government exams conducted in the country.

Candidates must know questions related to the financial terms are mostly asked in the Current Affairs, General Awareness or the Banking Awareness section of all major Government exams, especially Bank and Insurance exams.

It is important to have a wide and clear idea of the financial Institutions and financial terms if you are willing to appear for any such competitive exam.

To know the detailed syllabus ofBanking Awareness, aspirants can visit the linked article and start their preparation accordingly.

Through this article, aspirants will understand what is a bond, what are Government bonds, the different types of bonds and their characteristic features. Questions based on this topic may be generic or may be picked up from any current events in the financial market.

Table of Contents:
  1. Basics of Bond
  2. Important Features of a Bond for Investor
  3. Different Types of Bonds
  4. Some Points To Remember About Bonds
  5. Types of Bonds – Sample Questions

Candidates may also find a few sample questions based on Bonds and its types. This will enable candidates to understand the types of questions which may be asked from this topic.

Given below are a few related links for the reference of candidates:

Principles of InsuranceTypes of Bank AccountsDifferent Types of Cheque
History of Banking in IndiaFunctions of BanksTypes of Banks in India

Basics of Bond

Before learning about the different types of Bonds. It is important that a candidate knows what are Bonds. So starting with the basics of a bond, let us first answer a few basic questions based on bonds.

  • What is a Bond?

By Definition, “A Bond is a fixed income instrument that represents a loan made by an investor to a borrower.” In simpler words, bond acts as a contract between the investor and the borrower. Mostly companies and government issue bonds and investors buy those bonds as a savings and security option.

These bonds have a maturity date and when once that is attained, the issuing company needs to pay back the amount to the investor along with a part of the profit. This kind of dealing with bonds between the issuer and the investor is done by brokers.

Types of Bonds - Basics of Bond, General Features and Characteristics (1)

  • What are Government Bonds?

A bond issued by the Government of a country at a fixed rate of interest is called Government Bonds. These kinds of bonds are considered to be low-risk investments. Examples of Government bonds include Treasury Bills, Municipal Bonds, Zero-coupon Bonds, etc.

Aspirants must also know about the Indian Financial System and its components. To study about the same, visit the linked article.

Test your preparation for the upcoming Government exams now!
  • Free Online Government Exam Quiz
  • Previous Year Government Exam Question Papers PDF with Solutions
  • Free Online Mock Test Series with Solutions
  • Bank PO Previous Year Question Papers with Solutions

Important Features of a Bond for Investor

When an Investor is buying bonds, there are a few things which may be given consideration before investing in them. Given below are such important points to remember while investing in any bond:

  • Secured & Unsecured Bonds: Unsecured Bonds, also known as debentures are mostly the bonds issued by companies with a good reputation, high credit rating and the credibility of the company. The returns on such bonds are based on the profit and the success of the company. If the company makes a profit, then the amount along with interest is returned to the investor, else there may be difficulty in regaining the invested amount as well.The secured bonds offer some kind of security to the investor. These bonds are mostly considered to be Government bonds.
  • Taxation: Looks for bonds which exempt tax. Few corporate bonds levy tax on their bonds and bonds issued by Government, municipality bonds and few other do not impose a tax on the profit earned.
  • Preference of Liquidation: In case a Company gets in loss and is in debt, the money gained by selling the assets of the company is given in a certain order of preference. This is called preference of liquidation. The regained amount is distributed in ascending order of time in which the investments were made. Starting with the oldest Investors and then to the new ones.
  • Date of Maturity: Ensure that you check the maturity period of the bond and invest in something where you can earn more with a shorter time duration
  • Coupon Rate: The rate of interest at which a bond is issued and the Company is liable to pay the Investor is called the coupon rate. Research and look for Bond options which offer high coupon rate

The above-mentioned things are among a few which an investor must read through while buying a bond.

The links to the detailed syllabus for the various government exams are given below:

Bank Exam SyllabusSSC SyllabusRRB Syllabus
UPSC SyllabusUPSC CAPF SyllabusLIC Syllabus

Different Types of Bonds

There are various types of Bonds. A few of them have been discussed below in brief.

  • Traditional Bond: A bond in which the entire principal can be withdrawn at a single time after the bond’s maturity date is over is called a Traditional Bond.
  • Callable Bond: When the issuer of the bond calls out his right to redeem the bond even before it reaches its maturity is called a Callable Bond. Through this type of bonds, the issuer can convert a high debt bond into a low debt bond.
  • Fixed-Rate Bonds: When the coupon rate remains the same through the course of the investment, it is called Fixed-rate bonds.
  • Floating Rate Bonds: When the coupon rate keeps fluctuating during the course of an investment, it is called a floating rate bond.
  • Puttable Bond: When the investor decides to sell their bond and get their money back before the maturity date, such type of bond is called a Puttable bond.
  • Mortgage Bond: The bonds which are backed up by the real estate companies and equipment are called mortgage bonds.
  • Zero-Coupon Bond: When the coupon rate is zero and the issuer is only applicable to repay the principal amount to the investor, such type of bonds are called zero-coupon bonds.
  • Serial Bond: When the issuer continues to pay back the loan amount to the investor every year in small instalments to reduce the final debt, such type of bond is called a Serial Bond.
  • Extendable Bonds: The bonds which allow the Investor to extend the maturity period of the bond are called Extendable Bonds.
  • Climate Bonds:Climate Bonds are issued by any government to raise funds when the country concerned faces any adverse changes in climatic conditions.
  • War Bonds: War Bonds are issued by any government to raise funds in cases of war.
  • Inflation-Linked Bonds: Bonds linked to inflation are called inflation linked bonds. The interest rate of Inflation linked bonds is generally lower than fixed rate bonds

Other Related Links:

Current AffairsStatic GKDaily News Analysis
SSC General AwarenessBanking AbbreviationsTips to prepare General Awareness for Bank Exams

Some Points To Remember About Bonds

A few things to remember about the various bond types have been given below. Refer to these with respect to the upcoming government exams:

  • The repayment done through a Traditional Bond is also known as Bullet Repayment.
  • Bonds with a maturity period of 7 to 10 years are called “Notes”.
  • The Bonds can be categorised into four variants: Corporate Bonds, Municipal Bonds, Government Bonds and Agency Bonds.
  • The Bond prices are inversely proportional to the Coupon Rate. When the rate of interest increases the bond prices decrease and rate of interest decreases, the bond price increases.
  • The amount which the investor is liable to get after maturity of the bond is called its Face Value.
  • The amount at which the Investor buys a Bond is called its Issue Price.

Once a candidate goes through the entire description give above about Bonds, it types and its characteristics candidates shall be further able to answer the questions given below which may be asked with respect to the same.

Types of Bonds - Basics of Bond, General Features and Characteristics (2)

Types of Bonds – Sample Questions

Given below a few sample questions from the topic: Bonds and Its Types, for the assistance of candidates and to help them understand the pattern in which the questions may be asked.

Q 1. What are the Bonds with the Maturity Period of 7 to 10 years are also known as?

  1. Young Bonds
  2. Notes
  3. Paper Bonds
  4. Bills
  5. None of the Above

Answer: (2) Notes

Q 2. Which of the following bonds mean that the rate of interest for the entire duration of Bond, until it matures, remains the same?

  1. Zero-Coupon Bond
  2. Callable Bond
  3. Fixed-Rate Bonds
  4. Serial Bonds
  5. Extendable Bonds

Answer: (3) Fixed-Rate Bonds

Q 3. What is the other name for the repayment done by a Traditional Bond?

  1. Bullet Repayment
  2. Fixed Repayment
  3. Quick Repayment
  4. Rapid Repayment
  5. Series Repayment

Answer: (1) Bullet Repayment

Q 4. What term is used to define the payment that an Investor gets after the maturity of the Bond?

  1. Issue Price
  2. Investment Value
  3. Final Value
  4. Face Value
  5. Fixed Value

Answer: (4) Face Value

Q.5 What is the maturity period for medium-term bonds?

  1. 1-5 Years
  2. 5-8 Years
  3. Over 10 Years
  4. Less Than 10 Years
  5. More than 15 Years

Answer (3) Over 10 years

More questions of the same type may be asked in the final examinations. Candidates must also stay up to date with the latest news and current affairs based on any update regarding the bond as questions from this topic may also be asked based on current events.

Candidates who intend to appear for the upcoming Government exam recruitment can get exam information along with study material, preparation tips and syllabus details at BYJU’S.

Types of Bonds - Basics of Bond, General Features and Characteristics (2024)

FAQs

Types of Bonds - Basics of Bond, General Features and Characteristics? ›

The Bonds can be categorised into four variants: Corporate Bonds, Municipal Bonds, Government Bonds and Agency Bonds. The Bond prices are inversely proportional to the Coupon Rate. When the rate of interest increases the bond prices decrease and rate of interest decreases, the bond price increases.

What are the basic features types and characteristics of bonds? ›

Some of the characteristics of bonds include their maturity, their coupon (interest) rate, their tax status, and their callability. Several types of risks associated with bonds include interest rate risk, credit/default risk, and prepayment risk. Most bonds come with ratings that describe their investment grade.

What are the 5 main types of bonds? ›

There are five main types of bonds: Treasury, savings, agency, municipal, and corporate. Each type of bond has its own sellers, purposes, buyers, and levels of risk vs. return. If you want to take advantage of bonds, you can also buy securities that are based on bonds, such as bond mutual funds.

What are the basics of bonds? ›

Bonds are an investment product where you agree to lend your money to a government or company at an agreed interest rate for a certain amount of time. In return, the government or company agrees to pay you interest for a certain amount of time in addition to the original face value of the bond.

What is the type of bond? ›

There are many types of chemical bonds that can form, however the 3 main types are: ionic, covalent, and metallic bonds. You must become familiar with how they work and the differences between the 3 types.

What are the characteristics of bonding? ›

What are some characteristics of chemical bonds?
  • They hold atoms together inside the chemical molecules.
  • The strength of a chemical bond is determined by the difference in electronegativity (the higher it is, the greater the strength of the electrons attracted between atoms.)

What are the features of a common bond? ›

The most common bond features are callable, convertible, covered, expandable and retractable.
  • Callable. The call feature on a bond gives the issuer the right to compel bondholders to turn in their bonds within a certain timeframe for the call price. ...
  • Convertible. ...
  • Covered. ...
  • Extendable. ...
  • Retractable.
Mar 2, 2023

What are the 4 types of bonds explained? ›

Bonds are investment loans that pay interest. Corporate bonds, municipal bonds, U.S. government bonds and international market bonds are four of the most common types. The cost and barriers to investing vary across the types of bonds. The interest you earn on bonds can provide a steady source of income.

What are the three common types of bonds? ›

Different bond types—government, corporate, or municipal—have unique characteristics influencing their risk and return profile. Understanding how they differ and the relationship between the prices of bond securities and market interest rates is crucial before investing.

What are bonds, what are their features, and how are they traded? ›

A bond is a loan that the bond purchaser, or bondholder, makes to the bond issuer. Governments, corporations and municipalities issue bonds when they need capital. An investor who buys a government bond is lending the government money. If an investor buys a corporate bond, the investor is lending the corporation money.

What are the 3 basic components of bonds? ›

Key Points
  • The three basic components of a bond are its maturity, its face value, and its coupon yield.
  • Bond prices fluctuate inversely to interest rates.

What are the basic classification of bonds? ›

Bonds with a maturity period of 7 to 10 years are called “Notes”. The Bonds can be categorised into four variants: Corporate Bonds, Municipal Bonds, Government Bonds and Agency Bonds.

What are the basics of bonds in chemistry? ›

Each pair of shared electrons constitutes one chemical bond. We know that multiple bonds are shorter than single bonds. We know that multiple bonds are stronger than single bonds. As the number of bonds between atoms increases, the atoms are held closer and more tightly together.

What are the five characteristics of bonds? ›

Characteristics of Bonds
  • Face Value. Face value is the amount that the bond will be worth at maturity. ...
  • Coupon Rate. The coupon rate is the interest rate of the bond, this interest is calculated on the face value of the bond. ...
  • Coupon Date. ...
  • Maturity Date. ...
  • Issue Price.

What is bond and its features? ›

Bond is a fixed-income instrument that represents a loan from an investor to a borrower. It is a contract between the investor and the borrower, where the borrower uses the money to fund its operation and the investors receive interest on the investment.

How to classify bonds? ›

Identifying Types of Bonds
  1. Look at the chemical formula.
  2. Identify the elements in the compound.
  3. Determine if the elements are metals or nonmetals (using a periodic table)
  4. Metal – Metal = Metallic.
  5. Metal – Nonmetal = Ionic.
  6. Nonmetal -- Nonmetal = Covalent.

What are the characteristics of a term bond? ›

Term bonds are bonds from a single issue that all mature on the same date. On the maturity date of term bonds, the face value (principal) must be repaid to the bondholders. Call provisions within term bonds stipulate characteristics where issuers can redeem bonds from investors before the maturity date.

What are the characteristics and features of long term bonds? ›

Higher Yields: Long-term bonds usually offer higher yields than short- or medium-term bonds. This higher yield compensates investors for the increased risk associated with holding the bond for a longer period.

What are the features of investment bonds? ›

An investment bond is a single-premium life insurance policy that can be used to hold investments in a tax-efficient manner. As with any investment, the value of the bond may go up or down depending on how well your investments perform. The investor might not get back their initial investment.

What are the characteristics of bond order? ›

A high bond order indicates more attraction between electrons. A higher bond order also means that the atoms are held together more tightly. With a lower bond order, there is less attraction between electrons and this causes the atoms to be held together more loosely.

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