Fixed income asset class – Bonds


Bonds are most common example of fixed income asset class. Fixed income asset class provides fixed interest income over the investment period and returns original principal at end of maturity.

Bond types

1. Callable : Issuer right to buy back (Extra ordinary redemption, sinking fund redemption)
2. Floating rate notes: Coupon rates are rest periodically based on reference rates, lower quality of issuer higher the spread
3. Zero coupon bonds: Sold at discount and at maturity receives full value
4. Inflation linked securities: Fixed coupon plus amount to compensate inflation
5. High Yield Bonds (junk) :  Bonds rated below investment grade
6. Convertible bonds : bond that can be converted to other security at future date
7. Securitized bonds: bonds depending on underlying asset interests

If underlying asset are residential mortgage then its called MBS (Mortgage backed)
If underlying asset are non residential leases, credit card then it is called ABS (Asset backed)

In long term bonds perform better than government bills but less than equities.

Risks related with bonds:

1. Credit risk of issuer
2. Liquidity risk : Investor unable to sell bonds in secondary market
3. Reinvestment risk : Investor have to reinvest coupon income and principal
4. Inflattion risk: Purchasing power of coupon income and principal erode due to inflaion
5. FX risk: If investment in foreign bonds

Bond issuer types:

1. Governments
2. Agencies and local gov
3. Supranational authorities: World bank etc
4. Corporations

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