3 Types of Bonds. What are they & how are they traded?

Types of bonds

A bond is an agreement between an issuer, usually a corporation or a government and a holder usually a commercial institution, individual or another government.  The holder of the bond will expect to receive a fixed interest (the coupon) return for loaning the money and also expect to receive the principle (total sum loaned) back after the bond matures.

A bond is a generic word for a debt agreement or IOU but the actual names depend on the lifetime of the agreement.

  • Bills: have shorter term maturity dates usually between one and five years
  • Notes: medium term loans between six to twelve years
  • Bonds: longer term loans of more than twelve years

So now you know that U.S. Government T-Bills, is a treasury bill that is issued by the U.S. government for five years or less.

The coupon, or the interest earned by the holder of the debt varies depending on the credit quality of the institution issuing the bond.

For example is the German government issue bonds (bunts) they expect to only have to pay a few percentage points to the holder of the bond because they have a very good credit rating.

However, Spain when issuing bonds to cover their financial and tax revenue shortfall are considered riskier therefore have to pay a higher amount of interest, up to 5% or 6%.

This is why it is important that debtor nations like the U.S, UK and other European countries ensure their economies stay in good shape, as the cost of borrowing could suddenly increase due to perceived risk, and this could plunge a country into repayment problems.  This is why in 2012 we see serious issues in Europe with the PIGS (Portugal, Italy, Greece, Spain).

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