KVShenai, ia 07
Some bonds link their interest payment to the retail price index and such bonds are
called index linked bonds. The return on Index linked bonds is closer to `real interest
Bonds which allow the holder to exercise an option to convert into equity are called
Bonds which have no redemption date are called consols, irredeemables or
Debentures are bonds secured against some assets.
Bonds redeemable at the option of the issuer are `callable’ while bonds redeemable at
the option of the holder are `puttable.’
Gilts are Bonds issued by the British Government.
Bonds issued by corporates are corporate bonds.
Eurobonds are bonds sold internationally in the domestic currency of a country.
Strips are securities which result from breaking down a security into various
constituents which are sold off seperately. The usual way in which this is done is to
sell off each future coupon payment and the redemption amount for its present value.
Why are Gilts so much in demand?
The holder of a bond has default risk; ie the risk that the issuer will not honour
payments on the bond. It is also called the credit risk.
The two main credit rating agencies areM o o d y ’ s and Standard and Poor’s.
The annexure is a typical extract.
Note the distinction between
> Baa, Moody’s or > BBB S&P
`non-investment grade’: < Ba , Moody’s or < BB S&P Bonds with lower credit
ratings have a higher default risk and risk premium.
Non-investment grade bonds are also known as junk bonds.