Different Types of Bonds Explained: From Zero-Coupon to Green Bonds
When I first tried to organise my fixed-income portfolio, the variety of types of bonds felt overwhelming. A bond is simply a contract: I lend money to an issuer and, in exchange, receive interest and my principal back on a stated date. What changes from one bond to another are the cash-flow rules and the risks behind them. Here’s how I explain the major categories I actually use and track in India.
Government bonds.
For the safest core, I look at central and state government bonds (G-Secs and SDLs). Credit risk is minimal in domestic currency, but prices still move with interest rates, especially on longer maturities. Treasury Bills are short-dated and don’t pay coupons; they’re issued at a discount and redeemed at face value.
Corporate bonds and NCDs.
When I want a bit more yield, I consider well-rated corporate bonds—often listed as non-convertible debentures (NCDs). Here, I read the rating rationale, check leverage and interest-coverage, and note whether the instrument is secured or unsecured. Yield to Maturity (not the headline coupon) decides whether I’m being paid fairly for the risk.
Municipal bonds.
These fund local infrastructure like water and transport. The market is smaller, but I like their transparency when backed by escrowed revenues and strong covenants. Liquidity varies, so I size positions accordingly.
Zero-coupon bonds.
If I want a known payout on a specific date without interim income, I look at zero-coupon bonds. They’re issued at a discount and redeemed at par. Because all the return sits at maturity, they’re more sensitive to interest-rate moves; I use them only when the timeline is crystal clear.
Fixed-rate vs floating-rate.
Fixed-rate bonds pay the same coupon through life—great for cash-flow planning but exposed when rates rise. Floating-rate bonds reset their coupons to a reference (like a treasury yield or benchmark), which helps when I expect rates to drift higher.
Inflation-linked bonds.
To protect purchasing power, I consider instruments where principal and/or coupon track an inflation index. Returns feel lower in low-inflation years but hold value better when prices jump.
Perpetual and bank capital bonds.
Additional Tier-1 (AT1) and some perpetual bonds pay higher coupons but can skip payments or absorb losses, and they have no fixed maturity. I only allocate modestly to strong issuers and read the terms twice—these are not set-and-forget products.
Callable, puttable, and step-up structures.
Embedded options change outcomes. A callable bond can be redeemed early by the issuer (common when rates fall), so I always compute yield-to-call. Puttable bonds let me exit at set dates. Step-ups increase coupons over time and can be useful if I plan to hold longer.
Tax-free and legacy issues.
Older PSU tax-free bonds still trade on exchanges. The coupon is tax-exempt, but I focus on market price and YTM; a premium purchase can pull the effective return down even if the coupon looks attractive.
Green and sustainability-linked bonds.
These earmark proceeds for climate or social projects. I treat the label as a disclosure benefit, not a substitute for credit work—the issuer’s ability to pay still decides my allocation.
Special category: Sovereign Gold Bonds.
They behave differently from plain bonds—returns track gold prices plus a small interest—but they’re useful when I want gold exposure without handling the metal, and the tax treatment at maturity can be favourable under current rules.
The takeaway for me is simple: know which of these types of bonds fits the job you need done. I match maturities to goals, diversify across issuers and structures, and price everything on post-tax YTM rather than the coupon. Do that consistently, and bonds stop being a maze and start becoming a reliable, goal-driven part of your portfolio.
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