Bond Types

Kinds of Bonds

A number of different kinds of bonds offer variations on this basic formula. Some types of bonds provide alternative interest structures. A zero-coupon bond does not make periodic interest payments. The bondholder realizes interest by buying the bond substantially below its face value. A floating-rate bond has an interest rate that is changed periodically according to an established formula. There also may be provisions that allow either the issuer or the bondholder to alter a bond’s maturity date. A callable bond entitles the issuer to pay off the principal prior to the stated maturity date. Similarly, the owner of a putable bond can force the issuer to pay off the principal before the maturity date. A convertible bond gives the bondholder the right to exchange the bond for shares of the issuer’s common stock at a specified date. (1)