Types of Interest Payments

While the definition of interest remains the same no matter how that interest is paid, in order to suite the needs of both the entity issuing a bond, and the buyer of that bond, different bonds pay out their interest payments in different ways:

Fixed Rate Bonds

As the name suggests, the interest rate or “coupon” on a fixed rate bond stays the same, and doesn’t change at any point during the bond’s life.  A 30 year fixed bond with a 6% coupon pays 6% in the first year and 30th alike.

Floating Or Variable Interest Rate Bonds

Also as the name suggests, the interest rate on a floating rate Bond fluctuates based on some pre-determined variable, such as an index of market interest rates.

Zero Coupon Bonds

These are bonds that do not pay out interest on a regular basis, but rather in one lump sum at the end of the bond’s life (this is also called the bond’s maturity date).

Strips

A strip is basically the same thing as a zero coupon bond, but it is made by a financial institution from a bond that was issued as a fixed rate bond.

Inflation Linked Bonds

These are floating rate bonds where the interest rate they pay is linked to the level of inflation.  The most popular form of this type of bond here in the US are Treasury Inflation Protected Securities (TIPS) which you can learn about here.

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