Different Types of Bonds

Government Bonds
In general, fixed income securities are classified according to the length of time before maturity. These are the three main categories:

Marketable securities from the Government - known collectively as Treasuries - follow this guideline and are issued as Treasury bonds, Treasury notes, and Treasury bills (T-bills). Technically speaking, T-bills aren't bonds because of their short maturity. All debt issued by the federal government is regarded as extremely safe, as is the debt of any stable country. The debt of many developing countries, however, does carry substantial risk. Just like companies, countries can default on payments.

Municipal Bonds
Municipal bonds are the next progression in terms of risk. Cities rarely go bankrupt, but it can happen. Municipal bonds are the next progression in terms of risk. Cities rarely go bankrupt, but it can happen. Municipal bonds can be an effective holding for investors who wish to increase their yield over government bonds, in exchange for a slight increase in risk.

Corporate Bonds
A company can issue bonds just like it can issue stock. Large corporations have a lot of flexibility as to how much debt they can issue: the limit is whatever the market will bear. Generally a short-term corporate bond is less than five years; intermediate is five to twelve years, and long term is over twelve years.

Corporate bonds are characterized by higher yields because there is a higher risk of a company defaulting than a government. The upside is they can also be the most rewarding fixed-income investments because of the risk the investor must take on. The company's credit quality is very important: the higher the quality, the lower the interest rate the investor receives.

Other variations are convertible bonds, which the holder can convert into stock, and callable bonds, which allow the company to redeem an issue prior to maturity.

Zero Coupon Bonds
This is a type of bond that makes no coupon payments but instead is issued at a considerable discount to par value. For example, a zero coupon bond with a $1000 par value and ten years to maturity might be trading at $600. So today you pay $600 for a bond that will be worth $1000 in ten years. "Strip bonds" and "strip coupons" are essentially zero coupon bonds. Their name is derived from the fact that the bonds, originally interest bearing, were "stripped" of their interest payments.

Bond Derivatives
Bonds can also be offered as components of a financial derivative. One such product that has gained popularity in the past few years is the principal protected note (PPN). PPNs typically allow investors to participate in market gains while also acting like a bond by guaranteeing the amount invested. To read more about PPNs see "Principal-Protected Notes" - Disnat Bulletin, August 2007. Also see our fact sheet; "Reverse Convertibles 101", which explains this type of linked note.

Another way to indirectly invest in bonds is through mutual funds or exchange-traded funds (ETFs) that specialize in bonds. Disnat offers over 2,000 Canadian mutual funds as well as a comprehensive Mutual Fund Centre. To obtain a list of available Bond Funds, log into the Disnat client site and go to Marketplace, Mutual Funds. Then click the "Browse Available Funds" link at the top of the page and choose the appropriate category group from the dropdown menu (ie: Canadian Bond, High Yield Bond, etc.)

Also See

"New Issues: Convertible Debentures" - Disnat Bulletin, September 2004

iShares Canada (go to Product Information, Fixed Income Funds)

iShares USA (go to Product Information, Fixed Income Funds)

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