What are 'Plain Vanilla Bonds'?

'Plain Vanilla Bonds' are the most basic type of fixed-term, fixed-rate bonds with a pre-determined maturity amount. Read the article below to find out more about it.
Plain Vanilla Bonds| Credits: RupeeIQ
Plain Vanilla Bonds| Credits: RupeeIQ

'Plain Vanilla Bonds' are the most basic type of bonds, having a fixed coupon payment at pre-determined fixed intervals with a pre-determined maturity. Furthermore, the face value of the bond is also pre-determined and the investor receives the bond at the face value on the date of maturity. 

Let us understand this through a simple example: 

Suppose an investor invests in a 5-year bond having a 10% annual coupon rate (payment semi-annually) with the face value of Rs. 1000. 

We know that,

 S.I.= (P*R*T)/100 

Here, P stands for Principal Amount= 1000
R stands for Rate of Interest= 10%
T stands for Time= 5 years

Understand this through the table given below: 

Period Cash Flow
June 2015 Rs. 50
December 2015 Rs. 50
June 2016 Rs. 50
December 2016 Rs. 50
June 2017 Rs. 50
December 2017 Rs. 50
June 2018 Rs. 50
December 2018 Rs. 50
June 2019 Rs. 50
December 2019 Rs. 50 + Rs. 1000 = 1050

Thus, at maturity, an investor will get Rs. 1500. 

Plain Vanilla Bonds: Key Features

1- Fixed Coupon Rate.

2- Time of Coupon Payments are fixed. 

3- Fixed Date of Maturity. 

4- Fixed Face Value of the bond.

Plain Vanilla Bonds: Advantages

1- Easy valuation

2- Reduced volatility risk

3- High liquidity

4- Straightforward flow of cash

What do you mean by Plain Vanilla?

Plain vanilla is the most basic or standard version of a financial instrument, usually options, bonds, futures, and swaps. 

Plain Vanilla: Instruments

The instruments of Plain Vanilla are:

1- Options

2- Bonds

3- Futures

4- Swaps

Plain Vanilla Options: It allows the holder to buy or sell the underlying asset at a pre-determined price within a specific timeframe. It only has an expiration date and strikes price. 

Plain Vanilla Swaps: It includes a Plain Vanilla Interest Rate Swap, wherein two parties enter into an agreement. Here, one party agrees to pay a fixed rate of interest on a fixed amount on pre-determined dates and period. The other party makes payments on a floating interest rate to the first party for that same period of time. 

This type of exchange of interest rates on certain cash flows is used to speculate changes in interest rates. It also has Plain Vanilla Commodity Swaps and Plain Vanilla Foreign Currency Swaps. 

Plain Vanilla Futures: It is a financial contract that applies to the purchase of the asset for the buyer and the sale of the asset to the seller. It has a pre-determined future date and price.

What do you mean by Bonds?

Bonds are capital market instruments which are used to raise debt capital from the open market. They are often referred to as fixed-income instruments. 

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