Banking and Finance Essay Example | Topics and Well Written Essays - 2000 words

Banking and Finance - Essay Example Interest on the bond is provided every six months and the principle amount is given at the maturity date. Generally, bonds are issued by the corporation and government bonds are differentiated according to the payment of interest, the market they are issued in, the currency they are to be paid in and the legal status etc. Corporate bonds can be purchased through the security market. Company bonds provide high rate of interest but have more risks as compared to the government bond. While selecting the bond, the risk tolerance of the investor should be taken into consideration. Those who are ready to bear risks, can invest in corporate bonds and those who cannot afford any risks, can choose the government bond. â€Å" The credit risk associated with bonds range from relatively safe Treasury bills to extremely risky junk bonds to corporations or countries that are in a questionable financial position† (What are the Different Types of Bonds Available?, 2009, para. 4). The various kinds of bonds are as follows: Zero Coupon Bonds: The zero coupon bonds are those which became famous recently Zero coupon bonds are those bonds on which the companies do not provide the interest but issue the bonds at a discount rate with comparison to the maturity value. The difference between the issue price and the maturity value represent the return or interest. This can be explained through the following example: Suppose the company issues bonds at a value of $200 for each bond during a period of 5 years. Under zero bonds, the investor would not get interest on his investment but at the end of the particular period he will get $220 for each bond. It would then constitute the gain or interest on his investment. As per this, The issue price of bond = $200 Maturity value of bond = $220 Here $20 represents the gain or interest of investment Fixed Income Bonds: Fixed bond is a long term debt paper in which the rate of interest is fixed in advance. Under fixed income bonds, the inve stor would get a fixed and constant return on his investment at a regular interval and at the time of maturity, he will get the principle amount. Fixed income bonds provide safety to the investor on his investment, so these are preferable to those investors who would like to get stable return on their investment. Mostly state and central government issue this kind of bonds and these bonds are treated as a high safety investment. â€Å"The central or national governments also have the power to print money to pay their debts, as they control the money supply and currency of their countries† (Government Bonds, n.d., para. 2). Example: Consider an investor who makes investment on 12% bonds having a face value of $ 150. Suppose he invested on 100 bonds. The investor would get interest rate as given below: Investor makes investment = 100*$150 = $15000 The rate of interest is 12% Return = 15000 * 12 /100 = $1800 Floating rate bonds: In case of floating rate bonds, the interest provi ded to the investors during their investment is not predetermined. Interests on such bonds are paid in fluctuating basis, from time to time, according to the benchmark price. Under such bonds, the interest rate is determined in accordance with the market interest rate along with some other external factors. â€Å"The amounts of these variable payments are determined by the current market interest r