## Bonds

A bond is a fixed income security used to raise long-term funds. Bonds can be issued through:

Public Issue
Private Placement

### Classification Based on Call Options

Type	Feature
Callable Bond	Issuer can redeem before maturity at a pre-decided price
Puttable Bond	Investor can sell bond back to the company before maturity

> Memory tip: Callable = Company's right; Puttable = Purchaser's right.

### Types of Foreign Bonds

Bond	Key Feature
FCCB (Foreign Currency Convertible Bond)	Low interest; payable in foreign currency; convertible to equity
Plain Vanilla Bond	Simple bond — fixed interest or at discount; no embedded options
Convertible FRN	Option to convert to long-term security; protects against falling rates
Drop Lock Bond	FRN that locks into a fixed rate if interest falls below a trigger level
Variable Rate Demand Obligation	Investor can sell back to trustee; highly liquid FRN
Yield Curve Note (YCN)	Yield varies directly with interest rates; used to hedge interest rate risk
Euro Bond	Issued in a currency different from the country where issued; used by MNCs
Emerging Market Bond	Issued by developing countries; high yield and high risk; protected via CDS

### Types of Indian Bonds

Bond	Key Feature
Masala Bond	Rupee-denominated, issued outside India (e.g., NTPC raised funds this way)
Municipal Bond	Issued by municipal corporations for urban infrastructure
Government/Treasury Bond	Issued by GoI, State Governments, or RBI

Worked example

### Example 1

An Indian company issues a bond in London denominated in USD. This is a Euro Bond because it is issued in a currency (USD) different from the country of issuance (UK).

### Example 2

NTPC issues a bond outside India denominated in Indian Rupees. This is a Masala Bond — the currency risk is borne by the foreign investor, not NTPC.

### Example 3

A bond starts as a floating rate note. When the benchmark rate falls below 5%, it automatically locks in at a fixed rate for the remaining term. This is a Drop Lock Bond.

⚠️ Common exam mistakes

Confusing Euro Bond with bonds issued in Europe — Euro bonds are defined by the currency, not the geography (issued in a currency different from the country of issue).
Mixing up Callable and Puttable bonds — remember Callable = issuer's right to call back; Puttable = investor's right to put it back.
Thinking Masala Bonds carry INR risk for the issuer — the forex risk in Masala Bonds lies with the investor, not the Indian issuer.

Reference:

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Bonds – Classification, Types of Foreign Bonds & Indian Bonds

Worked example

⚠️ Common exam mistakes