What is a bond?
A bond is a fixed interest financial asset issued by governments, companies, banks, public utilities and other large entities. Bonds pay the bearer a fixed amount a specified end date. A discount bond pays the bearer only at the ending date, while a coupon bond pays the bearer a fixed amount over a specified interval as well as paying a fixed amount at the end date.
What are Double-barreled bonds?
A revenue bond issued by a municipal or state authority that is guaranteed by the overlying municipal or state authority.
For example, if a transport authority for a state issues a bond, in the event of a revenues from the transport authority are not enough to pay back the bond, the state government would use its tax revenues to make the interest and principal payments.
So, for these bonds, the cash flows are pledged by two distinct entities. The First entity is under obligation to make interest payments, whereas the other owes the principal payments.
These are municipal general obligation (GO) bonds as in contrast to revenue bonds because they are backed by the issuer and its taxing authority.
A revenue bond is a special type of municipal bond distinguished by its guarantee of repayment solely from revenues generated by a concerned revenue-generating entity associated with the purpose of the bonds.
Unlike Double Barreled (general obligation) bonds, only the revenues specified in the legal contract between the bond holder and bond issuer are required to be used for repayment of the principal and interest of the bonds;
other revenues like tax revenues and the general credit of the issuing agency are not so encumbered.
Since the security of return is not as high as that of double barreled bonds, revenue bonds generally offer a slightly higher interest rate than G.O. bonds.
however, they are usually considered the second-most secure type of municipal bonds.
Any government agency or fund that is run like a business and generates operating revenues and expenses can issue revenue bonds:
(a) Airports, seaports, and other transportation hubs
(b) Power plants
(c) Water Supply utilities
(d) Toll roads and bridges
(e) Prisons
Other Types of bonds:
(a) Fixed rate bonds have a coupon that remains constant throughout the life of the bond.
(b) Zero-coupon bonds pay no regular interest. They are issued at a substantial discount to par value, so that the interest is effectively rolled up to maturity.
(c) Registered bond is a bond whose ownership and subsequent purchaser is recorded by the issuer, or by a transfer agent. It is the alternative to a Bearer bond. Interest payments, and the principal upon maturity, are sent to the registered owner.
(d) Serial bond is a bond that matures in installments over a period of time.
(e) Book-entry bond is a bond that does not have a paper certificate.
(f) Lottery bond is a bond where Interest is paid like a traditional fixed rate bond, but the issuer will redeem randomly selected individual bonds within the issue according to a schedule. Some of these redemptions will be for a higher value than the face value of the bond.
(g) War bond is a bond issued by a country to fund a war.
(h) Inflation linked bonds, in which the principal amount and the interest payments are indexed to inflation.
(i) Asset-backed securities are bonds whose interest and principal payments are backed by underlying cash flows from other assets.
(j) Perpetual bonds are also often called perpetuities or ‘Perps’. They have no maturity date.
Related posts:
- Embedded Options Embedded Options It is common to grant issuers and bondholders an option to take an action against the other party regarding the owed money, either...
- Yield Spread What is Yield ? The term yield indicates the amount in cash that the owners of a security will get. Generally, it does not take...
- Cash Flows Classification The statement of cash flows is divided into three sections: (A) Financing activities (B) Operating activities (C) Investing activities (A) Cash flow from financing activities...
- Options Trading Strategies The simmering Sino-US relationships, paroxysms in European bond market and the domestic budget of this fiscal around the corner are the contributors of high volatility...
- Effective Asset allocation Techniques Asset allocation is the strategy used in choosing between the various kinds of possible investments, in other words, the strategy used in choosing in what...
| About Pristine | |
 | Pristine is India’s largest training provider for international certifications like CFA®, FRM®, PRM®. It has been found by industry professionals who have worked in the area of investment banking and private equity in organizations such as Goldman Sachs, Crisil - A Standard & Poors Company, Standard Chartered and Accenture. Pristine has conducted more than 500,000 man-hours of quality training in finance. It has conducted trainings for J. P. Morgan, Bank of America, E&Y, ING Vysysa, IIM Calcutta, NUS Singapore, ISB and others. |
Tags: asset backed, barrelled, bonds, Book-entry bond, CFA, CFA 2010, cfa 2011, double, Fixed rate bonds, FRM, frm 2011, government, inflation linked, lottery bond, maturity, perpetual bonds, PRM, Registered bond, revenue, revenue bonds, Serial bond, war bond