{"id":1767,"date":"2019-09-27T13:33:00","date_gmt":"2019-09-27T13:33:00","guid":{"rendered":"https:\/\/analystprep.com\/cfa-level-1-exam\/?p=1767"},"modified":"2026-03-10T18:03:02","modified_gmt":"2026-03-10T18:03:02","slug":"describe-different-types-bonds","status":"publish","type":"post","link":"https:\/\/analystprep.com\/cfa-level-1-exam\/fixed-income\/describe-different-types-bonds\/","title":{"rendered":"Describe Different Types of Bonds"},"content":{"rendered":"\n<script type=\"application\/ld+json\">\n{\n  \"@context\": \"https:\/\/schema.org\",\n  \"@type\": \"QAPage\",\n  \"mainEntity\": {\n    \"@type\": \"Question\",\n    \"name\": \"Which type of bond defers all interest payments until maturity?\",\n    \"text\": \"Which type of bond is an extreme type of deferred coupon bond and is expected to defer all interest payments until maturity?\\n\\nA. Zero-coupon bonds.\\nB. Credit-linked coupon bonds.\\nC. Index-linked bonds (linkers in the UK).\",\n    \"answerCount\": 1,\n    \"acceptedAnswer\": {\n      \"@type\": \"Answer\",\n      \"text\": \"The correct answer is A. Zero-coupon bonds defer all interest payments until maturity. Instead of paying periodic coupons, they are issued at a discount to par value and pay the full face value at maturity. Credit-linked coupon bonds provide protection related to credit events, and index-linked bonds adjust payments based on an inflation or price index rather than deferring interest.\"\n    }\n  }\n}\n<\/script>\n<script type=\"application\/ld+json\">\n{\n  \"@context\": \"https:\/\/schema.org\",\n  \"@type\": \"VideoObject\",\n  \"name\": \"Fixed-Income Securities: Defining Elements (2025 Level I CFA\u00ae Exam \u2013 Fixed Income \u2013 Module 1)\",\n  \"description\": \"This video lesson covers the defining elements of fixed-income securities. It explains bond features, indenture contents, types of covenants, and how legal, regulatory, and tax factors impact issuance and trading. It also explores cash flow structures, contingency provisions, and different bond types, highlighting how these elements affect both borrowers and lenders.\",\n  \"uploadDate\": \"2022-05-19T00:00:00+00:00\",\n  \"thumbnailUrl\": \"https:\/\/img.youtube.com\/vi\/7zXN8w_K6dQ\/maxresdefault.jpg\",\n  \"contentUrl\": \"https:\/\/www.youtube.com\/watch?v=7zXN8w_K6dQ\",\n  \"embedUrl\": \"https:\/\/www.youtube.com\/embed\/7zXN8w_K6dQ\",\n  \"duration\": \"PT53M26S\"\n}\n<\/script>\n\n\n\n<iframe loading=\"lazy\" width=\"560\" height=\"315\" src=\"https:\/\/www.youtube.com\/embed\/7zXN8w_K6dQ?si=BLyN4VYhn4tZzmSJ\" title=\"YouTube video player\" frameborder=\"0\" allow=\"accelerometer; autoplay; clipboard-write; encrypted-media; gyroscope; picture-in-picture; web-share\" referrerpolicy=\"strict-origin-when-cross-origin\" allowfullscreen><\/iframe>\n\n\n<h2><strong>Call Provisions<\/strong><\/h2>\n<p>A call provision gives the issuer the option to repurchase the bonds before maturity. The issuer repurchases the bonds at the market price, at par, or at a specified sinking fund price, whichever is the lowest.<\/p>\n<h2><strong>Special Bond Arrangements<\/strong><\/h2>\n<p>Sinking fund arrangements are formal plans for retiring the debts that reduce the credit risk of a bond. Typically, the issuer forwards repayments to a trustee. This may be unfavorable for investors due to reinvestment risk (having to reinvest at a lower rate). A floor prevents the coupon from falling below a specified minimum rate in favor of bondholders. Conversely, a cap cushions the issuer by preventing the interest rate from rising above a maximum rate.<\/p>\n<h2><strong>Other Types of Bonds<\/strong><\/h2>\n<ul>\n<li><strong>Floating-rate notes<\/strong> (FRNs) do not have a fixed coupon; but are linked to an external reference, such as the LIBOR. Interests fluctuate during the bond\u2019s life. FRNs generally have quarterly coupons.<\/li>\n<li><strong>Step-up coupon bonds<\/strong>, either fixed or floating, have\u00a0coupons that increase by specified margins at specified dates. Such bonds provide protection against rising interest rates.<\/li>\n<li><strong>Credit-linked bonds<\/strong> have coupons that change\u00a0in line with the bond\u2019s credit rating.<\/li>\n<li><strong>Payment-in-kind<\/strong> (PIK) coupon bonds allow the issuer to pay interest in the form of additional amounts of the bond issue rather than to cash payments. As a result, such bonds are favored by issuers concerned with cash flow problems.<\/li>\n<li><strong>Deferred coupon bonds<\/strong>, sometimes called split coupon bonds, pay no coupons for their first few years but later pay higher coupons. Such bonds are common in project financing.<\/li>\n<li><strong>Zero-coupon bonds<\/strong>\u00a0are an extreme form of deferred coupon bonds that pay no interest and, thus, are issued at a deep discount. Zero-coupon bonds defer\u00a0all interest payments until maturity.<\/li>\n<li><strong>Index-linked bonds<\/strong> are linked to a specified index offering protection for the investors. Some common indices are the UK Retail Price Index (RPI) or the US Consumer Price Index (CPI). Indices are transparent and regularly published. In addition, governments usually issue inflation-linked bonds or linkers.<\/li>\n<\/ul>\n<blockquote>\n<h2><strong>Question<\/strong><\/h2>\n<p>Which type of bond is an extreme type of deferred coupon bond and is expected to defer all interest payments until maturity?<\/p>\n<ol style=\"list-style-type: upper-alpha;\">\n<li data-tadv-p=\"keep\">Zero-coupon bonds.<\/li>\n<li data-tadv-p=\"keep\">Credit-linked coupon bonds.<\/li>\n<li data-tadv-p=\"keep\">Index-linked bonds, linkers in the UK.<\/li>\n<\/ol>\n<p><strong>Solution<\/strong><\/p>\n<p>The correct answer is <strong>A<\/strong>.<\/p>\n<p>Effectively, zero-coupon bonds defer all interest payments until maturity.<\/p>\n<p><strong>B is incorrect<\/strong> as credit-linked coupon bonds are not about a deferral of coupon interest but a protection for changes in credit rating.<\/p>\n<p><strong>C is incorrect<\/strong> because an index-linked bond is linked to a specified index but interest payments are not necessarily deferred.<\/p>\n<\/blockquote>","protected":false},"excerpt":{"rendered":"<p>Call Provisions A call provision gives the issuer the option to repurchase the bonds before maturity. The issuer repurchases the bonds at the market price, at par, or at a specified sinking fund price, whichever is the lowest. Special Bond&#8230;<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[9],"tags":[],"class_list":["post-1767","post","type-post","status-publish","format-standard","hentry","category-fixed-income","blog-post","no-post-thumbnail","animate"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v26.9 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>Types of Bonds Explained | CFA Level 1 - AnalystPrep<\/title>\n<meta name=\"description\" content=\"Learn about different bond types, including deferred coupon bonds, sinking fund arrangements, and callable bonds.\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/analystprep.com\/cfa-level-1-exam\/fixed-income\/describe-different-types-bonds\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Types of Bonds Explained | CFA Level 1 - 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