Basics
Some investors hold bonds to earn a steady income. Other investors try to make money
by trading.
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Portal-Investment
Article
01/04/2016
Basics
A bond is a debt instrument. Bond issuers issue bonds to raise funds. They typically commit to repay the bondholders the principal and interest on specified dates. In the market, bonds may also be referred to as bills or notes.
Common features of bonds
- Issuer: Bonds are commonly classified by the nature of their issuer, for example, government bonds, corporate bonds (issued by companies or their subsidiaries), and bonds issued by supranational organizations (such as the World Bank).
- Principal: This is also called the par value or face value. It is the amount repaid to the bondholders when the bond matures.
- Coupon rate: The issuer pays interest on the principal to the bondholders each year. Interest payments are normally distributed at regular intervals, e.g. annually, semi-annually, quarterly. The coupon rate can be fixed (remaining unchanged throughout the bond’s term), floating (periodically reset according to a predetermined benchmark, such as local inflation or HIBOR), or even zero-coupon. A zero-coupon bond is usually sold at a price below its principal. The bondholder's return is then the difference between the purchase price and the principal repaid on maturity.
- Term: This is the life of the bond, i.e. the period (usually a number of years) over which the issuer has promised to meet its obligations under the bond. Some bonds can be "perpetual" in the sense that they do not have a fixed maturity date.
- Guarantor: Some bonds are guaranteed by a third party called a guarantor. If the issuer defaults, the guarantor agrees to repay the principal and/or interest to the bondholder.
Common Types of Bonds
- Corporate bonds are issued by companies or their subsidiaries to finance their business activities.
- Government bonds are issued by the government. Government bonds are usually considered lower risk investments because of the relatively lower chance of default by a government.
- Perpetual bonds do not have a fixed maturity date but they pay a steady stream of interest forever.
- Callable bonds grant the issuer the right to repay the bond before it matures.
- Puttable bonds give you the right to sell the bond back to the issuer at a predetermined price.
- Convertible bonds give you the right to convert the bond into a specified number of unissued shares of the issuer or a related company.
- Exchangeable bonds allow you to exchange the bond for the shares of any organisation which are already in issue and held by the issuer or a related company.
13 February 2025
