Bonds are debt instruments, mostly issued by governments, corporations, and other organizations for long-term borrowing. Issuer of bonds promises to pay the bondholder pre-determined interests before the bond’s maturity and redeems the bond at a pre-determined price upon maturity.
Bonds are generally categorized by the following types:
- Fixed Rate Bond: Interest rate remains the same over time;
- Floating Rate Bond: Interest rate is adjusted over a pre-determined period of time with reference to certain market interest rate indicators;
- Zero Interest Rate Bond: The bond does not pay interest over time. At the time of issue the bond is sold with a discounted price. The bond price rises over time towards the face value of the contract, hence the investor profits from the price differences.