Bonds

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.