Some of the simple ways to classify bonds are based on the type of issuers, credit ratings, the type of coupons, and the presence of various options, such as call or conversion.
Depending on the type of issuers, there are government, corporate and quasi-sovereign bonds. Based on credit ratings, they can be classified as investment grade and non-investment grade bonds. Non-investment grade bonds are also called junk or high yield bonds. Depending on the type of coupon, the notes can be classified as zero coupon bonds, fixed rate notes, and floating rate notes. Zero coupon bonds do not pay coupons and are issued at a discount from face value. Fixed rate notes have a fixed coupon for the entire period until maturity, while floating rate notes have variable coupon rates. Coupon rates are generally tied to benchmark rates such as the London Interbank Offer Rate (LIBOR). The coupon rate is reset periodically.
Redeemable bonds can be redeemed by the issuer at a predetermined time at a predetermined price. The price at which the issuer can redeem them is the purchase price. The time they can be redeemed before expiration is called the call date.
Convertible bonds offer investors the option to convert the bonds into company shares. When equity markets are bullish and investors expect a significant improvement in equities, convertible bonds are attractive to investors.
There are other ways to classify bonds, depending on the country of issue, the currency of denomination and the country of risk of the issuing company.
Yankee bonds are denominated in US dollars and are issued in the United States by non-US companies. Eurodollar banknotes are denominated in USD and issued outside the US by non-US entities.
Kangaroo bonds are denominated in Australian currency, Australian dollar and issued in the Australian market by non-Australian companies. Kauri bonds are New Zealand dollar denominated notes issued in New Zealand by non-New Zealand entities. Samurai bonds are denominated in Japanese currency, Yen, and sold by non-Japanese companies in Japan. Maple notes are denominated in Canadian dollars and issued in Canada by non-Canadian companies.
Dimsums are RMB-denominated banknotes (Chinese currency) issued in Hong Kong and settled in CNH on the Hong Kong offshore market. The currency that is traded abroad in RMB in mainland China is known as CNY and abroad is known as CNH. Synthetic CNY bonds are denominated in RMB but settled in USD. Settlement will be carried out at an exchange rate based on the land exchange rate established by the People’s Bank of China (PBoC). Uridashi banknotes are denominated in a foreign currency (other than the Japanese yen) and are sold to Japanese retail investors.
These various types of fixed income securities provide investment opportunities for fixed income investors. However, investors should prudently consider the advice of financial advisers when assessing the various risks associated with them.
