Bond classification is achieved by taking a number of factors into consideration. Although this may not always be done in the same manner, there are certain factors that are common. These include the bond's security, convertibility, and maturity. Bond classification also tends to take price and the method of transfer into consideration.
One factor considered in bond classification is the security of an individual's investment. This security is measured to a large degree by assessing whether the purchased bond is secured. When a bond is secured, there are assets that are used as collateral. In the event that the issuer fails to pay the bondholder as agreed, the individual can theoretically use the collateral to recoup what is due to him.
Bonds that are not backed by collateral are often referred to as bare debenture. When an investor purchases such a bond, he takes more risk. The only security that he has regarding repayment is generally the issuer's reputation and creditworthiness.
The second factor considered in bond classification is the convertibility of the asset. A convertible bond is one that can be exchanged for other types of securities, such as common shares. Although these bonds tend to have lower interest rates, there are usually aspects that investors may find appealing. For example, a convertible bond will generally earn interest in the absence of stock price appreciation.
Maturity is a third factor in bond classification. When speaking of maturity with regard to bonds, the term refers to the point when the bondholder will be repaid. In assessing maturity, the span between the purchase date and the redemption date are considered. Some bonds have a series of maturity dates, which involve investors being repaid certain portions of their money periodically.
Price is the fourth factor considered in a bond classification. In this sense, price is not strictly focused on cost, but rather on whether there is a discount. Bonds are considered to be discounted when they are sold below their face value. For example, a bond is sold below par, or at a discount, if it can be redeemed for $100 US dollars (USD) but can be purchased for $50 USD.
A final classifying factor is the assessment of whether the asset is a bearer bond or a registered bond. This is known as the method of transfer. A bearer bond is essentially one that can be redeemed by whoever possesses the bond because it bears no name. These bonds can easily be transferred from one party to another. A registered bond is one that displays the name of the person entitled to paid the interest and principal.
