What are Fixed Rate Bonds?

Fixed-rate bonds are also called ordinary bonds, and the symmetry of floating-rate bonds is a traditional form of bonds in which bonds are fixed at the time of issue. Such bonds usually have fixed interest coupons and maturities printed on the coupons, and issuers pay interest every six months or a year. The coupon holder shall cut the coupon to collect interest from the issuer or its designated bank. This type of bond is more common when the market interest rate changes little, but when the market interest rate is unstable or even changes sharply, its issuance is greatly restricted. ^[1]

Fixed rate bonds

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Fixed-rate and floating-rate bonds

Fixed-rate bonds refer to bonds that, at the time of issuance, have interest rates that do not change throughout the repayment period. Fixed-rate bonds do not take into account market changes, so their funding costs and investment income can be predicted in advance, with less uncertainty. But bond issuers and investors must still bear the risk of fluctuations in market interest rates. If the future market interest rate declines and the issuer can issue new bonds at a lower interest rate, the cost of the original bond issue will appear relatively high, and the investor will receive a higher return than the current market interest rate, and the original bond price will be On the contrary, if the market interest rate rises in the future and the cost of newly issued bonds increases, the cost of the originally issued bonds will appear to be relatively low, and the investor's return will be lower than the return on the purchase of the new bonds. decline.

Floating interest rate refers to a bond that requires the bond interest rate to fluctuate regularly with the market interest rate at the time of issuance, that is, the bond interest rate

Changes and adjustments can be made during the repayment period. Floating rate bonds are often medium to long-term bonds. The interest rate of floating rate bonds is usually determined based on the market benchmark interest rate plus a certain spread. The interest rate of U.S. floating-rate bonds mainly refers to the 3-month maturity of national debt, while Europe mainly refers to the London Interbank Offered Rate (refers to the interest rate of short-term loans between banks based in London, which is considered to be the interest rate of the London financial market Benchmark). For example, at the end of April 1984, the former Soviet Union s Moscow National Bank in London, United Kingdom, issued a 7-year floating-rate bond of 5,000 yuan, with the interest rate being the interbank rate plus 0.185%.

There are many types of floating rate bonds. For example, floating rate bonds with upper and lower interest rate limits are stipulated, floating rate bonds that can be automatically converted into fixed rate bonds when the interest rate reaches a specified level, floating rate bonds with options, and The repayment period is fixed interest rate for a period of time, and mixed interest rate bonds with floating interest rate for another period of time.

Because the bond interest rate fluctuates with market interest rates, adopting floating interest rate bonds can avoid any significant difference between the actual yield of the bond and the market yield, so that the cost of the issuer and the investor's income are consistent with the market trend. However, the floating nature of bond interest rates also makes the actual cost of the issuer and the actual returns of investors with great uncertainty beforehand, which leads to higher risks.