Fixed rate or plain vanilla bond

Strip every special feature off a bond — no floating rate, no conversion into equity, no early amortisation of principal — and what is left is the fixed rate bond, which the workbook also calls the plain vanilla bond.

It has a fixed term to maturity, pays a fixed coupon at set intervals, and hands back the principal in one piece when it matures. Every other structure in the chapter — floating rate, zero coupon, convertible, amortising — is described as a variation away from this baseline.

The definition has three fixed pieces: a fixed term to maturity, a coupon paid at pre-defined periods, and the principal repaid on maturity. The bond is usually issued at face value and redeemed at par.

The workbook is careful to say how much variation the label can still absorb: the issue price may be slightly above or below par, the redemption price may be slightly above or below par, and the frequency of interest payment can vary — monthly, quarterly or annual. None of these tips a bond out of the plain vanilla category. What would tip it out is a coupon that resets against a benchmark (a floating rate bond), a coupon that stops altogether (a zero coupon bond), or a principal that comes back in instalments rather than one lump sum (an amortising bond).

A company issues a 3-year plain vanilla bond of face value Rs 1,000, coupon 9 percent annual, issued and redeemed at par.

An investor buying 100 such bonds pays Rs 1,00,000 and collects Rs 9,000 a year for two years, then Rs 1,09,000 in the final year — Rs 1,27,000 in total cash flows against Rs 1,00,000 invested, so long as the issuer does not default.

A quarterly-paying version of the same bond — Rs 22.50 every three months instead of Rs 90 once a year — is still, by the workbook's own words, plain vanilla: only the frequency changed, not the fixed-coupon, principal-at-maturity structure.

Chapter 3 (Characteristics of Debt Securities), section 3.4, lists fixed rate bonds as one of the debt-security types the chapter teaches — convertible, zero coupon, fixed rate, floating rate — and defines plain vanilla in the same breath. Expect a question asking which structure repays principal in one instalment at maturity with a fixed periodic coupon, against amortising and zero-coupon distractors.

• Plain vanilla means fixed coupon, principal at maturity — nothing more exotic is implied by the name.
• A shifted issue or redemption price, or a different payment frequency, does not disqualify a bond from being plain vanilla. The workbook says so explicitly.
• Do not confuse plain vanilla with zero coupon. A zero coupon bond pays no periodic interest at all; a plain vanilla bond pays interest every period and only returns principal at the end.
• Do not confuse plain vanilla with amortising. An amortising bond returns principal in instalments through its life; a plain vanilla bond returns it all at maturity.