Chapter 6, Problem 1DYU

Summary Introduction

To discuss: The various kinds of bonds.

Bonds are debt instruments which are used by the companies to raise finance and this instrument bears interest on maturity. The instrument has specified or foxed maturity period and pay a specify rate of interest to the holders on the principal amount.

Explanation of Solution

Following are the types of bonds:

• Treasury bonds: The federal government are the authority who are empowered to issue the Treasury bond in order to raise fund to meet its deficit in their budget. The treasury bonds are other ways categorized as credit-risk free bonds. Usually the yield from these kinds of bonds are lower and are exempt from the income taxes of state.
• Investment-grade corporate bonds: The investment-grade corporate bonds are usually issue by the following two parties:
• 1. (a) Companies with relatively strong balance sheet
  2. (b) Financing vehicles with relatively strong balance sheet
• High-yield bonds: The high yield bonds are issued by the following parties:
• 1. (a) Companies with relatively weak balance sheet
  2. (b) Financing vehicles with relatively weak balance sheet
• Foreign bonds: Foreign bonds are the bonds that are issued in the domestic or local market by the foreign entity to raise fund from the domestic market in the currency of domestic market.