This is the third blog in the series of SEBI 2018 Exam Study notes. In this blog, we are going to covering Types of Bonds in Securities Markets. You can read the part 1 and Part 2 here. As per the Exam Pattern of the SEBI 2018 Exam, Securities Market is the most important subject. It has 40 marks in Phase 1 of the Exam and 100 marks in Phase 2 Exam. Therefore, through this SEBI 2018 Exam Study notes series, we would help you get the basics of this subject covered.
SEBI 2018 Exam Study Notes – What are Bonds?
The bond is a debt security, under which the issuer owes the holders a debt and (depending on the terms of the bond) is obliged to pay them interest (the coupon) or to repay the principal at a later date, termed the maturity date. Interest is usually payable at fixed intervals (semi-annual, annual, sometimes monthly). (https://en.wikipedia.org/wiki/Bond_(finance))
SEBI 2018 Exam Study Notes – Types of Bonds
1) Zero Coupon Bonds
A zero coupon bond does not pay any coupons during the term of the bond. The bond is issued at a discount to the face value and redeemed at face value. The effective interest earned is the difference between face value and the discounted issue price. A zero coupon bond with a long maturity is issued at a very big discount to the face value. Such bonds are also known as deep discount bonds. (source – NISM.ac.in)
2) Floating Rate Bonds
Floating rate bonds are instruments where the interest rate is not fixed but re-set periodically with reference to a pre-decided benchmark rate. For instance, a company can issue a 5-year floating rate bond, with the rates being reset semi-annually at 50 basis points above the 1- year yield on central government securities. Floating rate bonds are also known as variable rate bonds and adjustable rate bonds. (source – NISM.ac.in)
3) Callable Bonds
Callable bonds allow the issuer to redeem the bonds prior to their original maturity date. Such bonds have a call option in the bond contract, which lets the issuer alter the tenor of the security. Such options give issuers more flexibility in managing their debt capital. If interest rates decline, an issuer can redeem a callable bond and re-issue fresh bonds at a lower interest rate. (source – NISM.ac.in)
4) Puttable Bonds
A Puttable bond gives the investor the right to seek redemption from the issuer before the original maturity date. For example, a 7-year bond may have a put option at the end of the 5th year. If interest rates have risen, Puttable bonds give investors the ability to exit from low-coupon bonds and re-invest in higher coupon bonds. (source – NISM.ac.in)
That is all from us in this part 3 of the SEBI 2018 Exam Study notes. We hope you find the information provided above useful for your SEBI 2018 exam preparation. Do not forget to give the Securities Markets Mock tests from Oliveboard to practice whatever you have learned in the above SEBI 2018 Exam Study notes. All the best.