The following figure summarizes the classification of bond markets into different categories:
Thus the bonds can be classified as follows:
1.1. On the basis of issuer
On the basis of the issuer, the bonds can be classified as:
a. Government Related Bonds: The government-related bonds issued by the organizations such as supernational organizations (like World Bank), sovereign governments (such as the government of the U.S., Canada, etc.), non-sovereign governments (such as province, state, or municipal corporation), and quasi-government corporations.
b. Corporate Bonds: These are the bonds issued by financial and non-financial corporations.
c. Structure Finance: These are securitized bonds such as mortgage-backed securities or asset-backed securities.
1.2. On the basis of credit quality
On the basis of credit quality, the fixed income securities may be classified into:
a. Investment Grade Bonds: These are the bonds that have really high credit ratings assigned by the rating agency such as BAA3 or BBB- and above.
b. Non-Investment Grade Bonds: These bonds do not enjoy very high ratings by credit rating agencies. Thus, these bonds offer very high yields but are considered speculative or junk in nature.
1.3. On the basis of maturity
On the basis of maturity, the fixed income securities may be classified into:
a. Money Market Bonds: These are the bonds that have a period of less than one year before maturity at the time of inception.
b. Capital Market Bonds: These are bonds that have a period of more than one year before maturity at the time of inception.
1.4. On the basis of currency
The currency of the bond’s cash flow determines what country’s interest rate affects the price.
1.5. On the basis of geography
On the basis of geography, the bonds can be classified into:
a. Domestic Bonds: These are the bonds issued by the local company in the country using the local currency.
b. Foreign Bonds: These are the bonds issued by the non-local company, but the issue is local and in local currency.
c. Eurobonds: These are the bonds issued in the currency of one country but sold in another country.
On the basis of geography, the bonds can also be classified as the ones belonging to emerging markets and the ones from the developed countries.
1.6. On the basis of coupon
On the basis of coupons, the bonds can be classified into:
a. Fixed Coupon Bonds: These are the bonds that pay interest at a fixed rate during the year.
b. Floating Coupon Bonds: These are the bonds that pay interest at a floating rate, that consist of a reference rate plus the spread (or margin). The reference rate is dependent upon some other rate such as LIBOR and usually, The spread is usually fixed and is stated on a basis point.
NOTE:
LIBOR is London Interbank Offered Rate. It is the rate at which unsecured loans can be obtained from banks in the Interbank Money Market (i.e. the markets for loans and deposits between banks for maturity up to one year).
For setting the LIBOR rate, 8-16 banks submit the daily rates they believe they could borrow at in five currencies (i.e. Euro, U.S. Dollar, Swiss Franc, British Pound, and Japanese Yen) for seven different time periods (ranging from 1-day to 1-year). Of these bids received from the banks, the highest and the lowest 25% of the bids are discarded, and LIBOR is the average of the mid 50% of the bids received.
The alternatives to using LIBOR as the reference rate are EURIBOR, TIBOR, SIBOR, HIBOR, and MIBOR.