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Home Economy

Floating Rate Bond and Other kinds of bonds

November 18, 2020
in Economy
Reading Time: 2 mins read
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Floating Rate Bond and Other kinds of bonds
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What are Floating Rate Bonds?

  • Floating rate bonds, also known as floating rate notes, are a type of bond characterized by floating rate of interest.
  • Unlike traditional bonds that pay a fixed rate of interest, floating-rate bonds have a variable rate that resets periodically. 
  • The frequency at which the yield of a floating rate note resets can be daily, weekly, monthly, or every three, six, or 12 months. 

Advantages and disadvantages of floating rate bonds

  • The advantage of floating-rate bonds, compared to traditional bonds, is that interest rate risk is largely removed from the equation. 
  • While an owner of a fixed-rate bond can suffer if prevailing interest rates rise, floating rate notes will pay higher yields if prevailing rates go up. 
  • As a result, they will tend to perform better than traditional bonds when interest rates are rising.
  • However, investors in floating-rate securities will receive lower income if rates fall because their yield will adjust downward. 
  • Also, investors in individual floating rate bonds lack certainty as to the future income stream of their investments.

Other kinds of bonds

  • Fixed rate bond: It is a bond that pays the same level of interest over its entire term. An investor who wants to earn a guaranteed interest rate for a specified term could purchase a fixed rate bond in the form of a Treasury, corporate bond, municipal bond, or certificate of deposit (CD)
  • Mortgage bond:This kind of a bond is secured by mortgage, or a pool of mortgages, that are typically backed by real estate holdings and real property, such as equipment
  • Zero Coupon bond: It is a debt security that does not pay interest but instead trades at a deep discount, rendering a profit at maturity, when the bond is redeemed for its full face value.
  • Serial bond:  It is a bond issue that is structured so that a portion of the outstanding bonds mature at regular intervals until all of the bonds have matured. These bonds are used to finance projects that provide a consistent income stream for bond repayment
  • Callable/redeemable bond: It is a bond that the issuer may redeem before it reaches the stated maturity date. A callable bond allows the issuing company to pay off their debt early
  • Extendable bond: It is a long-term debt security that includes an option to lengthen its maturity period. Because these bonds contain an option to extend the maturity period, a feature that adds value to the bond, extendable bonds sell at a higher price than non-extendable bonds
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Source: Investopedia & Economic Times
Tags: Prelims

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