We have posted the first part of capital market instrument in previous days. Where we highlighted the most common terms. Now it’s time to go the depth and here are some odd definitions.
1. Disaster Bonds: are issued to share the risk and increase the capital to link the investor return. The bigger the losses, the smaller the returns and vice versa. The principal and interest rate is decided by the occurrence of disaster or by the possibility of borrower’s default.
2. Options Bonds: covers the cumulative and non – cumulative bonds where interest is payable on maturity or periodically and the redemption of premium is offered to attract investors.
3. Easy Exit Bonds: is such a bond which can easily provide liquidity and an easy exit way for the redemption of bonds . In this bond, investor can encash the bonds whenever he wants, before maturity also.
4. Pay in kind Bonds: In this bonds interest for the first three to five years is paid through issue of additional bonds. So it is called as baby bonds as it is came from parent bonds.
5. Split Coupon Debentures: is issued at discounted price and interest accrues in the first two years for subsequent payment in cash. This helps better management of cash outflows in a new project depending upon cash generating capacity.
6. Dual Convertible Bonds: are the convertible bonds into equity shares or fixed interest debentures or preference shares. Within the conversion period, if it is mentioned in Prospectus then lender can convert the bonds at any options.
7. Indexed Rate Notes : In this instrument, the interest rate fixation is postponed till the actual date of payment, rather than fixing it on the date of the commitment. The interest rate is computed on the date of take down at then prevailing private placement rates, using a formula based on the index such as the 182 days treasury bills yield rates. These instruments are beneficial to a company in a high interest rate environment, if the rates are expected to decline between the date of commitment and the date of takedown.
8. Stepped Coupon Bonds: are the instruments in which interest rate is stepped up or down during the tenure of the bond. The main advantage from this instrument is if the interest is generally high.
9. Extendable Notes : are issued for 10 years with the flexibility to the issuer to review the interest rate every two years. So that the issuer can now the market conditions. However , investors have put option at par value every two years i.e. investor can sell the bond to the issuer at a fixed rate on the expiry of every two years. This instrument encourages long term investment by the favourable review of interest rates for every two years.
10. Industrial Revenue Bonds: are issued for development and security for the future industrial facilities. These may become attractive if certain income tax and wealth tax concession are offered. These bonds can be used to purchase or contract the industrial facilities.
11. Participating Preference Shares: As per the predetermined conditions, when a preference shareholders receive additional dividends is called as Participating Preference Shares. For example, preference shares are issued at the dividend rate of Rs.1. and at the end of the financial year end when company decide to give Rs.2 on each share as dividend. Then participating preference shareholder will receive additional Rs.1 dividend.
12. Participating Debentures: are debentures on which the holder receives a fixed payment of interest as well as a fixed share of the profit. In other words, they are similar to participating preference shares. They are unsecured corporate debt securities which participate in the profits the company. They might find investors if issued by existing dividend paying companies.
13. Third Party Convertible Debentures: They are debt with a warrant allowing the investor to subscribe to the equity of third firm at a preferential price visa vis the market price. Interest rate on third party convertible debentures is lower than pure debt on account of the conversion options. These instrument is suitable for high profile companies raising resources.
14. Mortgage Backed Securities: are the securities issued in market by providing loan as keeping security of property. Housing loans are widely used as the basis for issuing MBS (Mortgage Backed Security).
15. Carrot and Sticks Bonds: A variant of the traditional convertible bond with a low conversion premium to encourage early (the carrot) and a provision which allows the issuer to call the bond at a specified premium if the common stock is trading at a relatively modest percentage above the conversion price(the stick).
16. Capital Indexed Bonds: are the bonds issued to secure the inflation The capital indexed bond is one such product. The instrument will initially carry a face value of Rs 100. Instead of offering a nominal rate, the instrument will offer a real rate of interest.
Real interest rate is nothing but the nominal interest rate less the inflation. If inflation increases by 10 per cent, the face value of the bond will also increase by 10 per cent to Rs 110.
You will receive a real interest rate on Rs 110. The increase in the bond's principal amount protects your purchasing power. In the developed markets, these instruments are also called as inflation-protection securities.
17. Debt for Equity Swap: A transaction in which a corporation exchanges existing bonds (debt) for newly issued stock (equity). For example, XYZ Company can in essence cancel a portion of their debt and transfer the equivalent balance to equity. A debt-equity swap can help a company that is in financial trouble by canceling some of its outstanding debt. Other companies may take advantage of this process if the current value of their stock is high, allowing them to trade more debt for less stock.
18. Zero – Coupon Convertible Bonds: are the is company's issued bonds which can be convert into common stocks at a certain price or some time issued bonds can be converted into an interest bearing bond under certain circumstances. This is also called as Split Coupon Bonds.
19. Foreign Currency Convertible Bonds: is an instrument that is issued in a currency different than the issuer’s domestic currency with options to either redeem it at maturity or convert it into issuing company’s stock. It gives two option, one is to get the regular interest and principle and the other is to convert the bond into equities.
20. Gold Exchange Traded Funds: Exchange traded funds are those commodities or assets which can be traded in stock market. Investing in gold or other precious metals is very popular these days, but precious metals investing requires special attention to the logistics of the purchase. Gold ETF funds provide a method for investing in gold that eliminates these issues. The logistics referred to are the problems of insurance, storage, moving, and reselling, along with many others.
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