Investing: different types of bonds

Are you thinking about investing in bonds? Then, read on to easily figure out the best type of bond for you.

10:44 25 July 2013

Bonds are debt securities. Purchasing one means you’re lending the issuer (government, organisation, municipality, or corporation) your money. In return, the issuer will pay you specified rate of interest and will repay the face value of the bond.

 
Bonds can be classified based on credit ratings. There are bonds that are classified as investment grade and there are non-investment bonds.

Investment grade bonds are those that have relatively low risk of default. This means that the company or organisations that sell them are more unlikely to go bankrupt. Because they come with low risk, they also offer low interest rate.

Non-investment grade bonds or those that are commonly referred to as junk, are those companies or organisations that have less-than-stellar credit ratings. They appeal to investors because they offer higher yields that investment grade bonds.

Investors can choose between these two types of bonds based on their investment goal and risk tolerance. Seasoned investors would usually favour junk bonds as they offer great return of investment.

Some companies offering this type of bond may turn around their performance. When this happens, the face value of the bonds that they issued will increase.