Types of Bonds

BY: KOMAL KHERO

Definition of Bonds

A debt investment in which an investor loans money to an entity (corporate or governmental) that borrows the funds for a defined period of time at a fixed interest rate.

OR It is a contractual agreement by the borrower to

pay the holder of the bond fixed dollar amounts at regular intervals (interest and principal payments) until a specified maturity date, when final payment is made

A BOND

What Are Treasury Notes & Bonds?

•Sold by U.S treasury department.•Also known as T-Notes or T-bonds.

Treasury Notes & Bonds

Interest rate is paid semiannualy, every six months.

Sold at auction and can be bought for more or less then the face value.

• They Both are Issues to finance the national debt

Safest investments in the world.

Treasury Bonds Interest Rates

• Sometimes the interest rate on the T-notes & T-bonds is more than the money market securities because of Interest-rate risk.

• Lowest interest rates.

• They have No Default risk as govt. can print money to pay-off Debt.

• The coupon interest rate the issuer must pay, this rate does not fluctuate with market interest rates.

Difference between Notes & Bonds

NOTES HAVE MATURITY

BONDS HAVE MATURITY

Treasury inflation protected securities (TIPS)

TIPS are marketable securities whose principal is adjusted by changes in the Consumer Price Index. 

In order to protect investors from the negative effects of inflation, TIPS par value rises with inflation.

Treasury inflation protected securities (TIPS)

TIPS pay interest every six months and are issued with maturities of 5, 10, and 20 years.

TIPS have an interest rate that does not change throughout the holding of security.

Retirees can opt for such securities because they contain low-risk portfolio.

Treasury STRIPS

STRIPS is an acronym for 'separate trading of registered interest and principal securities'.

Treasury department started issuing Treasury STRIPS in 1985 apart from bonds, notes and bills.

Process of converting periodic coupon (Interest) payments and the principal of an existing government security into tradable zero coupon securities.

Treasury STRIPS- Example

A newly issued 5-year note would be stripped into eleven separate securities—ten representing the note's semiannual coupon payments, and one representing its final principal payment.

Treasury STRIPS

The Treasury disaggregates the individual cash flows into separate securities.

Treasury STRIPS

• Hence Each payment becomes a separate zero-coupon security.

• Each component has its own identifying number and can be traded separately.