Types of Bonds

General Categorization

Based on coupon interest rates, bonds can be classified into

• Fixed rate bonds
• Floating rate bonds
• Zero-coupon bonds

Fixed rate bonds have a coupon that remains constant throughout the life of the bond. A variation is a stepped-coupon bonds, whose coupon increases during the life of the bond.

Floating rate notes (FRNs, floaters) have a variable coupon that is linked to a reference rate of interest, such as LIBOR or Euribor. For example the coupon may be defined as three month USD LIBOR + 0.20%. The coupon rate is recalculated periodically, typically every one or three months.

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 (and usually taxed as such). The bondholder receives the full principal amount on the redemption date. Zero-coupon bonds may be created from fixed rate bonds by a financial institution separating ("stripping off") the coupons from the principal. In other words, the separated coupons and the final principal payment of the bond may be traded separately.

Government Bond: Bond of National Loan issued by Polish National Government in 1863.