GROUP: 1(Evening) GROUP MEMBERS: 1. 2. 3. 4. 5. FAHAD MUHAMMAD ALI NOUMAN MUHAMMAD FAHIM NATASHA MARYYAM USAMA IDREES TOPIC: TYPES OF BOND BONDS: A bond typically refers to a financial instrument where an investor lends money to an entity, usually a corporation or government, for a defined period at a predetermined interest rate. In return, the issuer of the bond promises to repay the principal amount at a specified maturity date, along with periodic interest payments. Bonds are often considered fixed-income securities because they provide a regular stream of income in the form of interest payments. They are commonly traded in financial markets and are an integral part of investment portfolios for individuals and institutions. Example: Let's say a corporation ABC Inc., wants to raise money to fund its expansion projects. ABC Inc. decides to issue bonds to raise capital. Here's a simple example: ABC Inc. issues bonds with a face value of $1,000 each, a maturity period of 5 years, and an annual interest rate of 5%. Now, if you decide to buy one of these bonds: - You pay $1,000 upfront to ABC Inc. - Every year, ABC Inc. pays you 5% of $1,000, which is $50, as interest. - After 5 years, when the bond matures, ABC Inc. pays you back the original $1,000. So, in total, over the 5 years, you'll receive $250 in interest payments ($50 each year for 5 years) plus the return of your initial $1,000 investment when the bond matures. This is how bonds work in a nutshell. TYPES OF BONDS: A. BASED ON INTEREST RATES: Fixed Rate Bond A fixed rate bond is a bond that pays the same level of interest over its entire term. An investor who wants to earn a guaranteed interest rate for a specified term could purchase a fixed rate bond in the form of a Treasury, corporate bond, municipal bond, or certificate of deposit (CD). Because of their constant and level interest rate, these are known broadly as fixed-income securities. “Pakistan Investment Bonds” is an example of Fixed-Rate Bond offered by State Bank of Pakistan. Floating-Rate Bond A floating-rate bonds is a debt instrument with a variable interest rate. The interest rate for an FRB is tied to a benchmark rate. Benchmarks include the U.S. Treasury note rate, the Federal Reserve funds rate—known as the Fed funds rate—the London Interbank Offered Rate (LIBOR), or the prime rate. Floating rate notes or floaters can be issued by financial institutions, governments, and corporations in maturities of two-to-five years. “Pakistan Investment Bonds – Semi Annual Floating Rate” is an example of FloatingRate bond offered by State Bank of Pakistan. Zero-Coupon Bond A zero-coupon bond, also known as an accrual bond, is a debt security that does not pay interest but instead trades at a deep discount, rendering a profit at maturity, when the bond is redeemed for its full face value. “Market Treasury Bills” is an example of Zero-Coupon Bond offered by State Bank of Pakistan. Inflation-Indexed Bonds These bonds provide investors with protection against inflation. The interest payments and/or the principal value of these bonds are adjusted periodically based on changes in an inflation index, such as the Consumer Price Index (CPI). B. BASED OF ISSUING AUTHORITIES: Corporate Bonds Corporate bonds are fixed-income securities issued by corporations to finance operations or expansions. Private or institutional investors who buy these bonds choose to lend funds to the company in exchange for interest payments (the bond coupon) and the return of the principal at the end of maturity. E.g. Engro Corporation Bond (issued by Engro Corporation Limited, a major conglomerate in Pakistan). Government bonds A government bond is a debt security issued by a government to support government spending and obligations. Government bonds can pay periodic interest payments called coupon payments. Government bonds issued by national governments are often considered low-risk investments since the issuing government backs them. Government bonds issued by a federal government may also be known as sovereign debt. E.g. Pakistan Investment Bonds (PIBs), WAPDA bond and Sukuk bond (issued by the Government of Pakistan to raise funds for various projects and expenditures). Treasury Bonds Treasury bonds are long-term investments issued by the U.S. government. They have a maturity of 10, 20, or 30 years. These bonds are backed by the U.S. and, therefore, are regarded as very safe. Due to their low risk, they offer lower yields than other types of bonds. However, when market interest rises, the prices of these longer-running and lower-yielding bonds can come quickly under pressure. Investors use Treasury bonds as a secure long-term investment. E.g. T bills. International Government Bonds International government bonds are debt securities issued by foreign governments. They allow investors to diversify their portfolios geographically and potentially benefit from currency fluctuations or higher yields. Depending on the country or region, they can have additional risks, including political instability, exchange rate volatility, and many others, making them a comparatively riskier investment choice. E.g. Japanese Government Bond (JGB), Pakistan International Sukuk (issued by the Government of Pakistan in international markets). Municipal Bonds Municipal bonds are debt securities issued by states, cities, or counties to fund public projects or operations. Like other type of bonds, they can also provide steady interest cash flow for the investors. Additionally, these bonds typically offer tax advantages since the interest earned is frequently exempt from federal and sometimes state and local taxes, too. E.g. Lahore Development Authority (LDA) Municipal Bond. Agency Bonds Agency bonds are generally issued by government-sponsored enterprises or federal agencies. Although not directly backed by the U.S. government, they have a high degree of safety because of their government affiliation. These bonds finance public-purpose projects and usually have higher yields than Treasury bonds. However, they may carry a call risk, meaning the issuer can repay the bond before its maturity date. Eg Pakistan Mortgage Refinance Company (PMRC) Bond. Bond ETFs Bond ETFs specifically invest in bond securities. They can offer broad diversification within the bond community, and an ETF may hold a range of different bonds. This provides liquidity, price transparency, and lower investment thresholds than individual bonds. However, like individual bonds, they're subject to interest rate and credit risk, among other risks. E.g. MCB Pakistan Sovereign Fund (ETF that invests in Pakistani government bonds) C. BASED ON REDEMPTION: Callable Bond/ Redeemable Bond A callable bond, also known as a redeemable bond, is a bond that the issuer may redeem before it reaches the stated maturity date. A callable bond allows the issuing company to pay off their debt early. A business may choose to call their bond if market interest rates move lower, which will allow them to re-borrow at a more beneficial rate. Callable bonds thus compensate investors for that potentiality as they typically offer a more attractive interest rate or coupon rate due to their callable nature. Non-callable Bonds/Non-redeemable Bond Non-redeemable bonds, also known as non-callable bonds, are fixed-income securities that cannot be redeemed or bought back by the issuer before their maturity date. This means that the issuer is obligated to pay interest to bondholders until the bond matures, at which point the principal amount is repaid to the bondholders. D. BASE ON SECURITY: Secured Bonds A secured bond is a type of investment in debt that is secured by a specific asset owned by the issuer. The asset serves as collateral for the loan. If the issuer defaults on the bond, the title to the asset is transferred to the bondholders. Unsecured bonds Unsecured bonds are kinds of securities that allow an individual to lend money without having any specific assets serve as collateral.
