Definition
These are the simplest and most common type of corporate bonds. They pay a fixed coupon (interest rate) at regular intervals and return the face value at maturity.
How They Work
- Investor buys a bond (usually $1,000 face value).
- The issuer pays a fixed coupon every 6 or 12 months.
- At maturity, the issuer repays the full principal amount.
Example
Company A issues a 10-year bond at 5% annual coupon. The investor pays $1,000 per bond. Each year, the investor receives $50 (5% of $1,000). After 10 years, the investor receives the $1,000 principal back.
Use Case: Steady income investors, pension funds, insurance companies.
Risk Level: Moderate (depends on issuer’s creditworthiness).
Definition
A floating rate note pays a coupon that resets periodically based on a reference interest rate (e.g., SOFR, Euribor) plus a fixed spread.
How They Work
- Coupon = Benchmark rate + Spread
- Adjusts every 3 or 6 months.
- Protects investors from rising interest rates.
Example
Company B issues a 5-year FRN with SOFR + 2% coupon. If SOFR is 3%, the coupon is 5%. If SOFR rises to 4%, the coupon becomes 6%.
Use Case: Investors expecting rising rates.
Risk Level: Lower interest rate risk, but still credit risk.
Definition
These bonds pay no periodic interest. Instead, they are issued at a deep discount and redeemed at face value at maturity. The difference is the investor’s return.
How They Work
- Buy at a discount (e.g., $600).
- No annual coupon payments.
- Receive $1,000 at maturity.
Example
Company C issues a 10-year zero-coupon bond for $600. The investor receives $1,000 at maturity. The $400 difference is the total interest earned.
Use Case: Long-term investors, tax planning (interest compounds internally).
Risk Level: Higher interest rate risk (price more sensitive).
Definition
Perpetual bonds have no maturity date — they pay coupons indefinitely. The principal is never repaid unless the issuer calls the bond.
How They Work
- Issuer pays coupon forever (e.g., 6% annually).
- Sometimes callable after a certain period.
Example
A bank issues a perpetual bond with a 6% coupon. The investor receives $60 every year indefinitely. The issuer may redeem after 5 years if permitted.
Use Case: Used by banks for regulatory capital.
Risk Level: Higher due to no maturity repayment.
Definition
Subordinated bonds rank below senior debt in case of bankruptcy. They are repaid only after all senior obligations are met.
How They Work
- Offer higher yield to compensate for higher risk.
- Common in bank capital structures (Tier 2 capital).
Example
Company D issues senior bonds at 4% and subordinated bonds at 7%. If the company defaults, senior bondholders get paid first.
Use Case: Yield-seeking investors.
Risk Level: High (lower priority).
Definition
Secured bonds: Backed by specific assets as collateral.
Unsecured bonds (debentures): Not backed by assets — only the issuer’s credit.
Example
- Secured: Bond backed by company’s property or receivables.
- Unsecured: Plain debenture relying solely on the issuer’s balance sheet.
Use Case: Secured = safer, Unsecured = higher yield.
Risk Level: Secured < Unsecured.
Definition
Callable bonds allow the issuer to redeem the bond before maturity — usually if interest rates fall, so they can refinance at a lower cost.
How They Work
- Issuer repays principal + premium if called.
- Investor faces reinvestment risk if bond is called early.
Example
A 10-year bond is callable after 5 years. If interest rates drop, the company calls the bond and issues new bonds at lower rates.
Use Case: Issuers seeking interest cost flexibility.
Risk Level: Medium (call risk).
Definition
Puttable bonds allow investors to sell the bond back to the issuer before maturity — usually if interest rates rise or credit quality deteriorates.
Example
A 10-year bond has a 5-year put option. The investor can sell it back at par after 5 years.
Use Case: Investors seeking downside protection.
Risk Level: Lower (investor control).
Definition
Convertible bonds give holders the option to convert their bond into a specified number of the issuer’s shares.
How They Work
- Pays coupon like a bond.
- Conversion usually profitable if stock price rises above conversion price.
Example
A $1,000 bond is convertible into 50 shares. If the share price rises above $20, conversion is beneficial.
Use Case: Fixed income + equity upside.
Risk Level: Medium–High.
Definition
Similar to convertible bonds, but they convert into shares of another company (e.g., a subsidiary or affiliate).
Example
A holding company issues exchangeable bonds that convert into shares of its listed subsidiary.
Use Case: Parent companies monetizing stakes.
Risk Level: Medium–High.
Quick Comparison Table (Professional View)
| Type | Coupon | Maturity | Conversion/Option | Risk | Use Case |
|---|---|---|---|---|---|
| Plain Vanilla | Fixed | Fixed | None | Medium | Stable income |
| Floating Rate (FRN) | Floating | Fixed | None | Medium-Low | Rising rate hedge |
| Zero-Coupon | None | Fixed | None | High | Long-term compounding |
| Perpetual | Fixed | None | Callable | High | Yield income |
| Subordinated | Fixed | Fixed | None | High | High yield |
| Secured | Fixed | Fixed | None | Lower | Safety with collateral |
| Callable | Fixed | Callable | Issuer call | Medium | Issuer flexibility |
| Puttable | Fixed | Puttable | Investor put | Low | Downside protection |
| Convertible | Fixed | Fixed | Convertible to equity | Medium-High | Hybrid returns |
| Exchangeable | Fixed | Fixed | Convertible into other equity | Medium-High | Monetizing holdings |