You can find two typical types of bonds categorized by issuer:

• Government Bond
  When a Government needs to raise funds to finance its expenditures, funds can be borrowed from the market by issuing bonds such as Treasury Bond (US Government) and Exchange Fund Notes (HK Government).
• Corporate Bond
  It is one of the financial instruments issued by private and public corporations. Companies use the funds raised for various purposes including building facilities, purchasing equipment and expanding the business. For example, MTRC, KCRC, and Hutchison Whampoa.

You can find four typical types of bonds categorized by par interest rate:

• Fixed rate bond
  Fixed rate bond is issued with a specified coupon rate, which is mainly determined by market conditions at the time of the bond's primary offering. Once determined, it is set contractually for the life of the bond. The coupon rate multiplied by the bond principal provides the dollar amount of the coupon. Investors usually receive interest payment quarterly, semiannually, and yearly whilst investors receive the face value of the bond upon maturity.
• Zero-coupon bond
  Zero-coupon bond is issued with no periodic interest at all, but the bonds are issued at a discount of par value. As the market value approaches the par value over time, investors will earn the differential value.
• Floating-rate bond
  Floating-rate bond is issued with a variable interest rate. Interest adjustments are made periodically during the life of the bond. In general the coupon rate is tied to a money market index like Treasury bills. This instrument provides a protection to the bondholder against the interest rate rises. The yield of floating rate bond is always lower than those of fixed-rate bonds with the same maturity.
• Convertible bond
  It is a type of corporate bond, which allows bondholder to convert the bond into a common stock of the bond issuer. In other words, it is a structured product, linking a bond and with a call option. Therefore, bondholders have the right to convert their bond to a common stock under the predetermined number of shares (conversion ratio) and price (conversion price). Two typical types of features are:
  • Call features
    Call features allow issuer to re-purchase the bond at a specified call price before the bonds expires. When the market interest rate is sliding down, issuer of a corporate bond with high coupon rate is likely to retire the high coupon debt and issue the new one at a lower coupon rate to reduce interest payment. Some bonds have "call protection" which guarantees the bond is non-callable for a specified period before their call date.
  • Put Features
    Allows the bondholder has the right to redeem the bond to the issuer at a designated price and time. The bondholder will do this only if the money can be reinvested elsewhere at a higher rate of return.

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Below is the table of credit ratings given by three major agencies in the market.

Please note that the top rating given by S&P and Moody's is AAA and Aaa accordingly. Most of the rating agencies have their finer gradation within each rating level. S&P and Fitch IBCA use suffix "+" or "-" to show a finer gradation of their ratings whilst Moody's applies numerical modifiers 1, 2 or 3 (modifier 1 indicates that the issue ranks in the higher end of its generic rating category).

Credit Ratings - Long Term Debts

Credit Risk	Moody's	Standard & Poor's	Fitch IBCA
INVESTMENT GRADE
Highest quality	Aaa	AAA	AAA
High quality (very strong)	Aa1	AA+	AA+
High quality (very strong)	Aa2	AA	AA
High quality (very strong)	Aa3	AA-	AA-
Upper medium grade (strong)	A1	A+	A+
Upper medium grade (strong)	A2	A	A
Upper medium grade (strong)	A3	A-	A-
Medium grade	Baa1	BBB+	BBB+
Medium grade	Baa2	BBB	BBB
Medium grade	Baa3	BBB-	BBB-
NON - INVESTMENT GRADE
Lower medium grade (somewhat speculative)	Ba	BB	BB
Low grade (speculative)	B	B	B
LOW GRADE
Poor quality (may default)	Caa	CCC	CCC
Highly speculative	Ca	CC	CC
Extremely poor prospects	C	C	C
In default	C	D	D

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