TYPES OF DEBT INSTRUMENTS

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Debt instruments provide fixed and higher returns. We have listed types of Debt Instruments that includes fixed income securities promising the investors that they will receive cash.

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TYPES OF DEBT INSTRUMENTS:

TYPES OF DEBT INSTRUMENTS

What are BONDS ?:

What are BONDS ? A bond is simply a loan with a definitive instrument features taken (issued) by an entity from the lender. Here, the entities taking a loan could be governments (central, state or municipal bodies) or companies (PSUs, private corporates , financial institutions etc) and are called as Issuers. The lender could be individuals, corporates , mutual funds, banks or anybody who invests in order to receive periodic income and are called as Investors.

A. REGULAR BONDS (PLAIN VANILLA BONDS):

A. REGULAR BONDS (PLAIN VANILLA BONDS) Fixed Coupon Maturity Date is fixed Does not have a call / put option Issued at Par

B. CALLABLE BONDS:

B. CALLABLE BONDS Bonds that allow the issuer to exercise a call option and redeem the bonds prior to its original maturity date. Since these options are not separated from the original bond issue, they are also called embedded options. The call option provides the issuer the option to redeem a bond, if interest rates decline, and re-issue the bonds at a lower rate.

C. PUTTABLE BONDS:

C. PUTTABLE BONDS Provide the investor with the right to seek redemption from the issuer, prior to the maturity date. A put option provides the investor the right to sell a low coupon-paying bond to the issuer, and invest in higher coupon paying bonds, if interest rates move up.

D. CONVERTIBLE BONDS :

D. CONVERTIBLE BONDS A convertible bond provides the investor the option to convert the value of the outstanding bond into equity of the borrowing firm, on pre-specified terms Exercising this option leads to redemption of the bond prior to maturity, and its replacement with equity Bonds can be fully converted or partly converted depending up on the predetermined terms

E. PERPETUAL BONDS:

E. PERPETUAL BONDS Fixed Coupon No Maturity Date Generally has a call option at the end of 5th or 10th year. Generally have a step up in coupon if call option is not exercised, i.e., the initial coupon rate will rise by pre-specified basis points mentioned at the time of issuance.

E. PERPETUAL BONDS:

E. PERPETUAL BONDS Perpetual structure but should conform to the basel III norms set by the committee of global apex banks Standards set to improve robustness in banks and to increase capitalisation levels Have certain covenants such as clause on conversion to equity, loss of principal or interest or both etc in the event of reaching a pre-described trigger levels.

G. BASEL III - TIER-II BONDS:

G. BASEL III - TIER-II BONDS Fixed Coupon Maturity Date is fixed Has a call option at the end of 5-10 years

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