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Created on 24.05.2018 | Updated on 15.02.2022

What are the most common types of bonds?

The world of finance is immense: bonds, funds, shares and many other securities keep not only the banks busy, but also the people who decide to invest their money. In the category of bonds alone, there is a huge number of different types. To help shed some light on the subject, this article provides an overview of the most important forms and types of bonds.

We explain the essentials of what bonds are in the article “What are bonds?”. However, in addition to standard or fixed-rate bonds (the most common form of this security), there are many different types of bonds and a wide variety of securities. Several thousand bonds are listed on the Swiss stock exchange SIX alone, and new ones are being added all the time. These bonds differ primarily in respect of who the issuer or debtor is, what interest rate applies, and how and when the investors receive back the amount invested. Below you will find the most important types of bonds.

Convertible bonds: bonds suddenly become shares

Convertible bonds are a special form of bond that are usually issued by companies. The creditor may convert part of the bond into shares in the company. Although these types of bonds have a lower interest rate, the creditor can participate in the company’s share price, i.e. benefit from any price gain in the company share, depending on the market development. 

Zero bonds: investment without interest is available

Zero bonds  do not have a current interest rate but a global interest rate on redemption. Their issue price (the purchase price) is therefore lower than the redemption price (the selling price). These types of bonds can, for example, be bonds that the debtor sells to the investor for CHF 9,500. At the end of the term, however, the investor receives CHF 10,000 – a higher value than the original investment.

Floaters: variable interest rates

Floaters, which are also called floating rate notes, are bonds with a variable interest rate. The interest rate on the cash investment is adjusted to the current interest rate level at regular intervals. This means that the issuer pays the periodic interest payments depending on this level and transfers the nominal amount back to the investor at the end of the term. 

Junk bonds: do you want to speculate?

Junk bonds, as their name implies, come with a very high risk. This type of bond originates in companies or countries with poor credit ratings. Because the risk of such investments is high, the corresponding interest payments are also higher than for other bonds.

More information on the risks associated with bonds can be found in our article “Put it simply, please! Bonds”. 

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