Updated: May 27, 2018
1. What is a Bond?
A bond is a long-term debt investment in which an investor temporarily lends money to a bond issuer. Typically, the bond issuer is a corporate or government who agrees to pay interest on a regular basis to the investors.
2. Who uses Bond?
Bond is used by an entity to raise money and by people who are looking for a stable investment. Owners of bonds are usually debtholders or creditors of the issuer.
3. Types of Bonds
· Treasury Bonds: issued by the government to fund its budget deficits.
· Other Government Bonds: issued by federal agencies
· Investment-Grade Corporate Bonds: issued by companies with relatively strong balance sheets
· High-Yield Corporate Bonds (Junk Bonds): issued by companies with relatively weak balance sheets
· Foreign Bonds: bonds denominated by foreign currencies
· Mortgage-Backed Bonds: their value drops when the rate of mortgage prepayments rises
· Municipal Bonds: issued by states or local governments
4. Characteristic of Bonds:
· Face value is the money amount the bond will be worth on the day the bond matures.
· Coupon rate is the rate of interest the bond issuer will pay to the bondholder on the face value of the bond. The coupon rate is expressed as a percentage.
· Coupon dates are the dates on which the bond issuer will pay the interest to the bondholder.
· Maturity date is the date on which the issuer will pay the bondholder the face value of the bond.
· Issue price is the price at which the bond issuer sells the bonds when they are first issued.
5. How do Bonds work?
When a company need to raise money to finance planned projects or to sustain current operations, they may issue bonds instead of getting loans from a bank. The issuer issues a bond that lawfully states the interest rate that will be paid and the time the initial bond must be returned.