Straight Bond financial definition of Straight Bond
The interest rate is known as coupon rate and interest is payable at specified dates before bond maturity. Due to the fixed coupon, the market value of a fixed-rate bond is susceptible to fluctuations in interest rates, and therefore has a significant amount of interest rate risk. That being said, the fixed-rate bond, although a conservative investment, is highly susceptible to a loss in value due to inflation. Unlike a fixed-rate bond, a floating rate note is a type of bond that contains a variable coupon that is equal to a money market reference rate, or a federal funds rate plus a specified spread.
What it is:
Although the spread remains constant, the majority of floating rate notes contains quarterly coupons that pay-out interest every 3 months with variable percentage returns. At the beginning of each coupon period, the rate is calculated by adding the spread with the reference rate. This structure differs from the fixed-bond rate which locks in a coupon rate and delivers it to the holder semi-annually over a course of multiple years.
Bonds generally provide higher rates of interest than other bank accounts, so fixed rate bond accounts are ideal for people who have spare money that they can afford to lock away for a fixed period of time. There are a number of factors that you need to be aware of before choosing your account, for example, some accounts offer interest that it adds onto your balance monthly, which then accumulates more interest throughout the year based on the total balance.
Other accounts pay the interest owed when the term ends, or pay the interest into a separate savings account on a monthly basis, so you will only be paid interest on the opening balance. Purchasing a fixed rate bond is knowing, from the very start, what to expect out of the investment. But despite the difficult year for convertibles in , the interest-rate increases took an even greater toll on straight bonds.
Riding out the market in a convertible. Panasonic Issues Straight Bonds. MU is planning to issue subordinated straight bonds locally for retail investors, the Nikkei has reported. Mizuho Corporate Bank's prime rate is linked to the market yields on its five-year, straight bonds. Mizuho Corporate Bank to lift long-term prime 0.
Japan's largest mobile phone carrier said the straight bonds will be issued at These are also called as a dual coupon or multiple coupon bonds. These are just the opposite of Step-Up Bonds. These are bonds where the coupon usually steps down after a certain period.
They may also be designed to step down not once but in a series too. Floating rate bonds are so called because they have a coupon which is not fixed but rather linked to a benchmark. These types of bonds are similar to the floating rate bond in that the coupon is not fixed and is linked to a benchmark; however, the differentiating thing is that the rate is inversely related to the benchmark. In simple words, if the benchmark rate goes up; the coupon rate comes down and vice versa. Extendable bonds are bonds that allow the holder to enjoy the right to extend the maturity if required. The holder has an additional benefit in this case because if the rate of interest in the market reduces, the holder may choose to extend the tenor and enjoy the higher rate of interest in terms of coupon payment.
For this benefit, the holder may enjoy the coupon rates that are usually lower than a plain vanilla bond. These are types of bonds which allow the issuer and the bondholders to reset the coupon rate based on the then prevailing market scenario. This is not linked to any benchmark but on the basis of renegotiation between the issuer and the bondholders.
This is usually the case where bond tenor is very long.
Bonds and their Types
These types of bonds pay a coupon rate on the face value till the life of the company. Though Perpetuity means forever, bonds with maturity above years are also considered to be perpetual bonds. Convertible bonds are a special variety of bonds which have an inbuilt feature of being converted to equity shares at a specified time at a pre-set conversion price. Foreign currency convertible bond is a special type of bond issued in the currency other than the home currency. In other words, companies issue foreign currency convertible bonds to raise money in foreign currency.
These bonds are similar to the convertible bonds but differ in one aspect that they can be exchanged for equity shares but not of the issuer. These can be exchanged for equity shares of another company which the issuer may have stakeholding.
Bonds that are issued with a specific feature where the issuer has the right to call back the bonds at a pre-agreed price and a pre-fixed date are called as callable bonds. Since these bonds allow a benefit to the issuer to repay off the liability before maturity, these bonds usually offer a coupon rate higher than a normal straight coupon-bearing bond. Bonds that are issued with a specific feature where the bondholder has the right to return back the bonds at a pre-fixed date before maturity are called as puttable bonds.
Since these bonds allow a benefit to the bondholders to ask for the principal repayment before maturity, these bonds usually offer a coupon rate lower than a normal straight coupon-bearing bond. In the US, Government dealer firms usually break down a coupon-bearing bond into a series of zero coupon bonds by considering each cash flow as a separate bond. For example, a 5-year semiannual coupon-bearing bond can be split into 10 zero coupon bonds with coupon amount as face value and 1 zero coupon bond with principal amount as the face value.
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