Understanding Bonds: Advantages, Types, and Analysis
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Key Advantages of Bonds for Investors
Investing in bonds offers several key benefits:
- Source of Current Income: They are a good source of regular income.
- Relative Safety: Investment in bonds is relatively safe from large losses.
- Priority in Default: In case of default, bondholders receive their payments before shareholders can be compensated.
Comprehensive Bond Classification
Bonds are classified by their key features, which include:
- Form of Payment
- Coupon Payment
- Collateral
- Type of Circulation
- Type of Issuers
- Recall Possibility
- Place of Circulation
- Quality
- Other Miscellaneous Types
By Form of Payment
- Non-interest-bearing Bonds
- Regular Serial Bonds
- Deferred-interest Bonds
- Income Bonds
- Indexed Bonds
- Optional Payment Bonds
By Coupon Payment
- Coupon Bonds
- Zero-coupon Bonds
- Full Coupon Bonds
- Floating-rate Bonds
By Collateral
- Secured Bonds
- Unsecured Bonds
- Debenture Bonds
- Mortgage Bonds
- Asset-backed Securities
- General Obligation Bonds
- Guaranteed Bonds
- Participating Bonds
- Revenue Bonds
By Type of Circulation
- Convertible Bonds
- Interchangeable Bonds
By Type of Issuers
- Treasury Bonds
- Municipal Bonds
- Corporate Bonds
- Industrial Bonds
- Public Utility Bonds
By Recall Possibility
- Callable Bonds
- Non-callable Bonds
By Place of Circulation
- Internal Bonds
- External Bonds
By Quality
- Gilt-edged Bonds
- Junk Bonds
Other Types of Bonds
- Voting Bonds
- Senior Bonds
- Junior Bonds
Essential Bond Analysis Methods
Bond analysis includes both quantitative analysis and qualitative analysis.
Key Financial Ratios for Bond Analysis
The most important financial ratios for bond analysis are:
- Debt/Equity Ratio
- Debt/Cash Flow Ratio
- Debt Coverage Ratio
- Cash Flow/Debt Service Ratio
Groups of Qualitative Indicators
- Economic Fundamentals
- Market Operation
- Management Capability
- Bond Market Factors
- Bond Ratings
Macroeconomic Factors Influencing Bonds
Factors with a Positive Influence
- Increase in investments
- Decrease in savings level
- Increase in exports
- Decrease in imports
- Increase in government spending
- Decrease in taxes
Factors with a Negative Influence
- Decrease in investments
- Increase in savings level
- Decrease in exports
- Increase in imports
- Decrease in government spending
- Increase in taxes