Types of bonds - Central Excise Act,1944, Indirect Tax Laws Video Lecture | Indirect Tax Laws - B Com

in this video we're going to talk about
the different types of bonds that a firm
or organization could issue to raise
capital so just quickly what we're
talking about with a bond whatever type
of bond you have we basically have a
promise to pay and you're promising to
pay a principal and you're also
promising to pay interest so you have
the principal you have interest now that
interest may actually be implicit you
don't actually have interest payments
you might have a deep discounted bond
and that's something we're going to get
into but but you always have these these
two things present and then you have a
lending agreement you have some
covenants restrictions on what the firm
can do with the money but in any event
let's just get right into the types and
so we'll have a secured versus unsecured
is a very important distinction when
we're talking about what type of bond
we're dealing with and by secured what
we're talking about is that the firm's
pledge some kind of collateral so if we
think about a person for a moment
instead of instead of a firm
I mean think of a mortgage is basically
the person is borrowing money and
they're pledging their house as
collateral
a house now a firm or School District or
something like that will pledge assets
right machines any kind of asset that
basically the bar or the lender could
seize right so this is these are things
that could be seized if the lender
doesn't get its money if it doesn't get
repaid and go and take the machines it
can take the the warehouse so basically
the borrowing has been secured by assets
it's got assets backing it up in case
the person or the firm doesn't pay now
unsecured there's no collateral and you
might think of well why would why would
anyone lend if there's no specific
collateral attached well some firms
don't have a lot of assets that they
could pledge in that case what they're
really pledging is basically their
profit stream right
now that's riskier so this is riskier
for the lender so what do they do while
they charge a higher interest rate a
higher interest rate to compensate for
that risk and in some cases there's a
really high interest rate because
there's a lot of risk and in those cases
we call it like a jump bond for example
there were a lot of acquisitions
financed in the 1980s with really high
interest rates because they were very
risky and they were called junk bonds so
it's basically a high yield this is a
high-yield bond it's not secured by any
specific collateral so so this is a very
important distinction when we're
thinking of what type of bond we're
dealing with whether it's actually
backed up by hard assets or whether it's
unsecured at another distinction of
bonds is to Wonderware okay well is this
a term bond is it a serial bond or is it
claw libel if it's callable or non
callable now let me let me actually talk
about this this term and serial first so
term is basically the bond has a
specific maturity date all right so in
five years this bond is going to mature
and at that point the principal needs to
be repaid let's say it was a million
dollars of bonds that million dollar
needs to be repaid that's what we're
talking about a maturity date there's a
specific point in time now you might
think well wait a minute it doesn't
don't all bonds have this well that's
that's kind of what we get into with
with the serial no ship we basically got
so the term bond is there's one maturity
date a serial bond would have multiple
maturity dates multiple dates and it
might be like a school district or
something it's a certain amount of money
each year and so then you say okay well
this year a certain amount of this bond
is going to come due and the next year
we're not talking about interest or
actually talking about the principal so
as multiple maturity dates a serial bond
and a callable bond is actually actually
a little bit more unusual in the
callable basically at any point in time
the bond can be called back what does
that mean it means that they could
immediately say okay now
the bond is due to or basically you
could just say let's say it's callable
at 102 let's give an example so at any
point in time they could pay so let's
say the bond was $100 you could pay a
hundred and two and say okay now there's
no more bond which we've called this
bond back by paying 102 which is two
dollars more than the face value right
now there is no bond it's basically been
immediately matured so we'll just say
this is immediate upon being called and
call that a call feature does the bond
have a call feature so now another thing
to think about is is whether there's
convertibility of the bonds
convertibility and what we're talking
about what convertibility is can the
bond be converted or change into a
different type of instrument so for
example you have a 100 dollar bond but
can that be exchanged for 15 shares of
stock of common stock right so you say
okay look I need $100 I'll give you this
$100 bond you tell the lender and you
say at any point in time if you so
desire you can exchange this bond for 15
shares of common stock that would be a
convertible bond not all bonds are like
that
this would again be it's similar to
having a call feature on a bond
it could be convertible or non
convertible now another distinction with
bonds is that we talked earlier about
how every bond has interest well not all
have interest payments some interest is
kind of implicit in the bond itself we
call a zero interest bond is basically
I'll just give you a quick example so
instead of saying okay every six months
there's going to be interest pain
mence and you have to pay $50 interest
or something like that until the bond is
mature instead of that what you say is
okay look I'll give you $600 today and
you give me $700 next year and then
that's it that's just it or it's just
there's no interest payments as such the
interest is basically implied in this
difference of $100 so you're giving your
you're the lender is giving out $600 but
they're getting $700 back upon maturity
so no periodic interest payments
they're just discounting they're
discounting the face value all right so
the face value is $700 that's so they're
going to get back but they're saying
we'll give you six and so that interest
is just accounted for in the difference
between those two amounts so that's
called a zero interest bond a deep
discounted bond and another feature of
bonds is whether they actually have
someone's name on it or not and that's
that's when we get into the idea of
whether bond is registered or bearer
bond so a registered bond actually has
someone's name so it's a specific person
right this is john doe's bond specific
person and a bearer bond it does not
have a name so just anybody for example
if you remember the movie diehard with
Bruce Willis the bad guy was trying to
steal hundreds of millions of dollars in
bearer bonds now that wouldn't have been
effective if they're registered bonds
because that's in somebody else's name
but a bearer bond is not in anybody's
name so assuming you have the bearer
bond you can go ahead and get the money
even it is because it's not in anybody's
name so now we can also think about
commodity backed or asset backed bonds
commodity backed and these are a little
bit unusual and that we normally think
of a bond being redeemed with cash right
there's this maturity day you repay the
thousand
dollars or so forth but but commodity
backed can actually be repaid with
commodities so we think of things like
gold silver oil these types of things so
someone says okay instead of paying you
X amount of dollars I'll give you 20
ounces of gold for each to redeem each
bond so so it's basically the the bond
itself is not backed by cash or it's not
going to be repaid in cash it actually
could be repaid with the commodity