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    Types of Bonds

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    snehachandan91
    There are three types of bonds: 1) Irredeemable bonds, also called perpetual bonds, which never mature and continuously pay interest without a maturity date. 2) Redeemable bonds, which have a finite maturity period and pay annual or semiannual interest, with the principal repaid at maturity. Semiannual interest payments increase the bond's value due to compounding. 3) Zero coupon bonds, also called deep discount bonds, which are issued at a discount to the face value and do not pay periodic interest, but rather the full face value at maturity. The difference between the discounted price and face value represents the effective interest earned.

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    Types of Bonds

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    snehachandan91
    282 views2 pages
    There are three types of bonds: 1) Irredeemable bonds, also called perpetual bonds, which never mature and continuously pay interest without a maturity date. 2) Redeemable bonds, which have a finite maturity period and pay annual or semiannual interest, with the principal repaid at maturity. Semiannual interest payments increase the bond's value due to compounding. 3) Zero coupon bonds, also called deep discount bonds, which are issued at a discount to the face value and do not pay periodic interest, but rather the full face value at maturity. The difference between the discounted price and face value represents the effective interest earned.

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    There are three types of bonds: 1) Irredeemable bonds, also called perpetual bonds, which never mature and continuously pay interest without a maturity date. 2) Redeemable bonds, which have a finite maturity period and pay annual or semiannual interest, with the principal repaid at maturity. Semiannual interest payments increase the bond's value due to compounding. 3) Zero coupon bonds, also called deep discount bonds, which are issued at a discount to the face value and do not pay periodic interest, but rather the full face value at maturity. The difference between the discounted price and face value represents the effective interest earned.

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    282 views2 pages

    Types of Bonds

    Uploaded by

    snehachandan91
    There are three types of bonds: 1) Irredeemable bonds, also called perpetual bonds, which never mature and continuously pay interest without a maturity date. 2) Redeemable bonds, which have a finite maturity period and pay annual or semiannual interest, with the principal repaid at maturity. Semiannual interest payments increase the bond's value due to compounding. 3) Zero coupon bonds, also called deep discount bonds, which are issued at a discount to the face value and do not pay periodic interest, but rather the full face value at maturity. The difference between the discounted price and face value represents the effective interest earned.

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    TYPES OF BONDS Bonds are of three types: (a) Irredeemable Bonds (also called perpetual bonds) (b) Redeemable

    Bonds (i.e., Bonds with finite maturity period) and (c) Zero Coupon Bonds.

    Irredeemable Bonds or Perpetual Bonds


    Bonds which will never mature are known as irredeemable or perpetual bonds. Indian Companies Acts restricts the issue of such bonds and therefore these are very rarely issued by corporates these days. In case of these bonds the terminal value or maturity value does not exist because they are not redeemable. The face value is known the interest received on such bonds is constant and received at regular intervals and hence the interest receipts resemble a perpetuity. The present value (the intrinsic value) is calculated as: V0=I/id If a company offers to pay Rs. 70 as interest on a bond of Rs. 1000 par value, and the current yield is 8%, the value of the bond is 70/0.08 which is equal to Rs. 875

    Redeemable Bonds :
    There are two types viz.,bonds with annual interest payments and bonds with semiannual Interest payments. Bonds with annual interest payments Basic Bond Valuation Model: The holder of a bond receives a fixed annual interest for a specified number of years and a fixed principal repayment at the time of maturity. The intrinsic value or the present value of bond can be expressed as: V0 or P0= nt=1 I/(I+kd) n +F/(I+kd) n Which can also be stated as follows V0=I*PVIFA(kd, n) + F*PVIF(kd, n) Where V0= Intrinsic value of the bond P0= Present Value of the bond I= Annual Interest payable on the bond F= Principal amount (par value) repayable at the maturity time n= Maturity period of the bond Kd= Required rate of return Bond Values with SemiAnnual Interest payment: In reality, it is quite common to pay interest on bonds semiannually. With the effect of compounding, the value of bonds with semiannual interest is much more than the ones with annual interest payments. Hence, the bond valuation equation can be modified as: V0 or P0= nt=1 I/2/(I+id/2) n +F/(I+id/2) 2n Where V0=Intrinsic value of the bond

    P0=Present Value of the bond I/2=Semiannual Interest payable on the bond F=Principal amount (par value) repayable at the maturity time 2n=Maturity period of the bond expressed in halfyearly periods kd/2=Required rate of return semiannually.

    Valuation of Zero Coupon Bonds.


    In India Zero coupon bonds are alternatively known as Deep Discount Bonds. For close to a decade, these bonds became very popular in India because of issuance of such bonds at regular intervals by IDBI and ICICI. Zerocoupon bonds have no coupon rate, i.e. there is no interest to be paid out. Instead, these bonds are issued at a discount to their face value, and the face value is the amount payable to the holder of the instrument on maturity. The difference between the discounted issue price and face value is effective interest earned by the investor. They are called deep discount bonds because these bonds are long term bonds whose maturity some time extends up to 25 to 30 years

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