BUS614: International Finance

There are additional special classes of bonds, including:

Inflation linked bonds (linkers) are those in which the principal amount and the interest payments are indexed to inflation. It is one type of floating rate bond. The interest rate is normally lower than for fixed rate bonds, with a comparable maturity. However, as the principal amount grows, the payments increase with inflation. Treasury Inflation-Protected Securities (TIPS) and I-bonds are examples of inflation linked bonds issued by the U.S. government. There are also other indexed bonds. For example equity-linked notes and bonds indexed on a business indicator (income, added value) or on a country's gross domestic product (GDP).

Convertible bonds are bonds that let a bondholder exchange a bond for a number of shares of the issuer's common stock. Exchangeable bonds allows for exchange to shares of a corporation other than the issuer.

Asset-backed securities are bonds whose interest and principal payments are backed by underlying cash flows from other assets. Examples of asset-backed securities are mortgage-backed securities (MBS's), collateralized mortgage obligations (CMOs), and collateralized debt obligations (CDOs).

Subordinated bonds are those that have a lower priority than other bonds of the issuer in case of liquidation. In case of bankruptcy, there is a hierarchy of creditors. First the liquidator is paid, then government taxes, etc. The first bond holders in line to be paid are those holding what is called senior bonds. After they have been paid, the subordinated bond holders are paid. As a result, the risk is higher. Therefore, subordinated bonds usually have a lower credit rating than senior bonds. The main examples of subordinated bonds can be found in bonds issued by banks and asset-backed securities. The latter are often issued in tranches. The senior tranches get paid back first, the subordinated tranches later.

Perpetual bonds are also often called perpetuities or "perps". They have no maturity date. The most famous of these are the UK Consols, which are also known as Treasury Annuities or Undated Treasuries.

A registered bond is a bond whose ownership (and any 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. On the contrary, a bearer bond is an official certificate issued without a named holder. In other words, the person who has the paper certificate can claim the value of the bond. Often they are registered by a number to prevent counterfeiting, but may be traded like cash. Bearer bonds are very risky because they can be lost or stolen. Especially after federal income tax began in the United States, bearer bonds were seen as an opportunity to conceal income or assets.

A serial bond is a bond that matures in installments over a period of time. In effect, a $100,000, 5-year serial bond would mature in a $20,000 annuity over a 5-year interval.

Some companies, banks, governments, and other sovereign entities may decide to issue bonds in foreign currencies because it may appear to be more stable and predictable than their domestic currency. Issuing bonds denominated in foreign currencies also gives issuers the ability to access investment capital available in foreign markets. Some examples include:

• Eurodollar bond – U.S. dollar-denominated bond issued by a non-U.S. (European) entity.
• U.S. Yankee bond – a US dollar-denominated bond issued by a non-U.S. entity in the U.S. market.
• Samurai bond – a Japanese yen-denominated bond issued by a non-Japanese entity in the Japanese market.
• Bulldog bond – a pound-sterling-denominated bond issued in England by a foreign institution or government.
• Kimchi bond – a Korean won-denominated bond issued by a non-Korean entity in the Korean market.