Before taking a deep dive into all the bonds and their benefits, let’s take a sneak peek into the bonds.
What are Bonds?
Bonds are a type of debt instrument, issued by organizations for a long term period or let’s say a period of more than 1 year in order to raise their money through borrowings.
Companies raise capital to issue bonds to financial investors in terms of the financial agreement, where the organization vows to pay the principal amount along with the interest to the holder of the bond after a specific date. The amount and the interest are paid in the form of coupons.
It may be noted that some bond don’t pay interest to the financial investors, but it is mandatory for the issuers to pay the principal amount to the investors.
Types of Bonds
- Revenue Bonds
Revenue bonds are a form of municipal bonds.
They are set up by income obtained from specific projects which might go from highways, local stadiums, toll bridges and more.
These bonds offer securities to the investors by assisting with income generated projects.
Normally, these bonds are issued by any government entity or asset that is governed as a business.
With the help of a revenue bond, it is feasible for government organizations to cut their expenditures on different infrastructure projects. In addition to this, funds collected from the revenue bonds may also be piped towards the development and construction of airports.
Types of Revenue Bonds
Air terminal Revenue Bonds – Airport terminal bonds are a form of municipal bonds that are mainly issued by the municipal corporation and airport authority. The income produced through the air terminal itself is utilized to impel the bond forward.
Toll Revenue Bonds – This is again the type of municipal bond that is utilized to coordinate income towards the development of a public project. For instance, the construction of bridges, tunnels or expressways. Income generated through tolls paid by those that utilize the public project This revenue is utilized to pay the principal and interest payment relevant to the bond.
Utility Revenue Bonds – This type of bond falls under fundamental services bonds owed to the funds paid by financial investors. With the help of these debt securities, varied public utility activities can be financed.
Hospital Revenue Bonds – This type of bond is intended to help the development of new medical hospitals, nursing homes, clinics etc. Funds generated from these bonds may be distributed towards buying new equipment for these medical buildings or can be utilized to fund upgrades within existing medical clinics.
Revenue produced through these medical hospitals is guided towards payments to bondholders.
- Municipal Bonds
Municipal bonds are a type of debt instruments that are given on the behalf of municipal corporations or bodies associated with them the nation over.
Revenue raised through municipal bonds is directed towards financing projects focused on the economic development of the region being referred to.
This can be ranging from creating and upgrading schools and hospitals to giving better conveniences to the public in general.
Municipal bonds can be bought with a maturity period that adds up to three years following which the issuing municipal company is committed to giving returns to the bondholders by means of property and professional tax accumulated or through revenue produced from different projects.
Types of Municipal Bonds in India
- General Obligation Bonds
In these types of bonds, funds can be generated for fluctuated projects aimed at developing the current infrastructure. When these bonds are matured, the repayment and interest given to bondholders are handled by means of the revenue made from different projects and the modes of tax collection.
The main focus of income bonds is to generate funds for specific projects that may be impending like financing the development of another structure.
When these bonds mature, the repayment and interest given to bondholders are handled by means of income unequivocally produced through the revenue generated in the bonds. The income generated by projects which are funded with the aid of revenue bonds is stored in an escrow account.
- Euro Bonds
A Eurobond can be perceived to be a bond issued in cash that differs from that which prevails across the nation over or market inside which it has been issued.
In spite of the fact that its name may lead one to think that it has connections to Europe or the “euro” cash, there exist no ties between the two. It, instead, serves as an external currency of securities and bonds given with it are also referred to as external bonds.
- Government Bonds
Government bonds are a type of debt instrument that can be issued by both – central and state governments of the country. Governments issue these bonds only when they face any liquidity crisis or they are in dire need of funds to improve and develop infrastructure.
In India, government bonds can be considered expensive bonds and that’s why these fall under the G-Sec category. These are long term investment securities that can be issued from 5 years to 40 years.
- Perpetual Bonds
Perpetual bonds are also known as consol bonds or prep, these bonds can be considered fixed income securities that don’t have a maturity date set up. This type of bond is conventionally perceived to be an equity instrument instead of a debt instrument.
- Junk Bonds
Junk Bonds are called high return bonds. Junk bonds are referred to those bonds that fall below the investment grade clarified by the three huge bond rating agencies i.e., Moody’s Standard and Poor’s, and Fitch.
Junk bonds have a higher degree of default with respect to different bonds. What makes them famous among investors is that these bonds pay high returns compared to other bonds.