Page 48 - Banking Finance November 2025

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in their company. Additionally, bonds often come with lower 4. Convertible Bonds
interest rates compared to other forms of borrowing, such A convertible bond is a type of hybrid security, combining
as bank loans.
features of both debt and equity. It is a bond issued by a
company that can be converted into a predetermined
Different Types of Bonds number of shares of the issuing company's stock at certain
1. Zero-Coupon Bonds times during the bond's life, typically at the discretion of the
Zero-coupon bonds are issued at a discount to their face bondholder. These bonds offer investors the option to
value and do not pay periodic interest. Instead, investors convert their debt into equity, providing potential upside if
receive the bond's face value at maturity. The difference the company performs well.
between the purchase price and the face value represents
the investor's return. 5. Inflation-Adjusted Bonds
Inflation-adjusted bonds, also known as inflation-linked
Example: Suppose the Government of India issues a zero- bonds, provide protection against inflation. The principal
coupon bond with a face value of Rs. 10,000 at a discounted amount of the bond and the interest payments are adjusted
price of Rs. 7,500. After ten years, the bond matures, and according to changes in the inflation rate. It may also be
the investor receives Rs. 10,000, earning a profit of Rs. considered as type of floating rate bond.
2,500.
Example: The Government of India issues Inflation-Indexed
2. Coupon-Paying Bonds Bonds (IIBs) where the principal and interest payments
Coupon-paying bonds provide regular interest payments to increase with inflation, ensuring that the investor's
investors, typically annually or semi-annually. The interest purchasing power is maintained.
rate, known as the coupon rate, is fixed and is a percentage
of the bond's face value. 6. Callable and Putable Bonds
Callable Bonds: These bonds can be redeemed by the
Example: A corporate bond with a face value of Rs. 1,00,000 issuer before maturity at a specified price. Issuers may
and a coupon rate of 7% will pay Rs. 7,000 annually to the call bonds when interest rates fall, allowing them to
bondholder until maturity. refinance the debt at a lower rate.

Example: A company issues a callable bond with a 10-
3. Fixed and Floating Rate Bonds year maturity but decides to redeem it after five years
Fixed-Rate Bonds: These bonds have a fixed coupon
rate that remains unchanged throughout the bond's life.
Investors know exactly how much interest they will
receive, making these bonds relatively low risk.
Example: A fixed-rate bond with a 6% coupon rate will
pay Rs. 6,000 annually on a face value of Rs. 1,00,000,
irrespective of market interest rates.
Floating Rate Bonds: These bonds have a variable
coupon rate that is typically linked to a benchmark
interest rate, such as the Reserve Bank of India's (RBI)
repo rate. The interest payments fluctuate with changes
in the benchmark rate.
Example: A floating rate bond with a coupon rate linked
to the RBI's repo rate might have an initial rate of 5%.
If the repo rate increases, the bond's coupon rate will
also increase, providing higher interest payments to the
investor.

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