There are various types of bonds which are there in market, in which an investment can be made depending upon the market conditions and investors outlook.
Few of the prominent ones are:
- Floating rate Bonds – These bonds come with a floating rate and doesn’t carry a fixed interest rate. This usually protects an investor from the volatility and gives them a consistent return over a period of time. If the interest rates are low and rises in due course of time, the interest paid by an entity on this bond also rises. As it’s not possible to time the interest cycle to perfection by anyone, hence this is a good option in debt instruments.
- Liquid Bonds/Funds – These instruments have a maturity period of up to 91 days. Here liquid refers to liquidity or the money. These funds and bonds are usually the safest with a relative lower rate of interest. The money raised is used for shorter term capital requirements and money invested is also the idle money for a very short time. For example, a corporate or an individual who has a capital and doesn’t need it for 2 months can look for this month to make some return rather than keeping the corpus idle.
- Money Market funds – These funds usually have a tenure of 91 to 365 days. One-year FD is also a kind of money market instrument. The interest earned is higher than liquid funds and is looked to materialize short term investment goals. These are also used if an individual is not sure of the interest rate scenario and only wants to take a shorter-term exposure.
- Short and long-term bonds – These bonds can have the tenure from 1 year to 30 years and interest rate is a function of various macro factors and tenure involved. These are issued for long term capital requirements where a project has a long gestation period.
Above is a broad classification of different categories of bonds and the purpose is for basic acquaintance with debt instruments. This is to highlight that they are also varied in nature and each has its own specific purpose and usage.