Explaining a Bond
A bond refers to a debt investment wherein an investor lends money to a business company (governmental or corporate) that borrows the funds for a specific time period at a fixed interest rate. The bonds are used by municipalities, companies, states, and US and foreign governments to finance various different projects and activities. Generally, these bonds are referred to as fixed income securities in addition to being one of the three main asset classes, along with stocks and cash equivalents.
As explained by Investopedia, the indebted entity (as an issuer) issues a bond that states the interest rate (coupon) that should be paid and when the loaned funds (bond principal) are to be returned (maturity date). The interest on a bond is generally paid every six months (half-yearly). The main categories of bonds include municipal bonds, corporate bonds, and US Treasury bonds, notes and bills, which are as a group referred as “Treasuries.”
Features of a Bond
The key features of a bond are as listed below:
· Principal, nominal, or face amount: This is the amount on which interest is paid by the issuer. This amount, generally, has to be paid back at the end of the term. Some structured bonds might feature a redemption amount which is different from the face amount and can be associated with the performance of certain assets like stock or commodity index thus resulting in an investor getting less or more than the initial investment.
· Issue price: This is the price at which investors buy the bonds at the time of issue, which is generally equivalent to the nominal amount.
· Maturity date: This is the date on which the nominal amount has to be repaid. The duration of time until the maturity date is generally referred to as the term or tenor or maturity of a bond. It can be any length of time. Most bonds commonly have a thirty years’ term.
· Coupon: This is the amount which is paid by the issuer as the interest rate to the bond holder. Generally, this rate is fixed all through the life of the bond. On coupon dates, the holder gives the coupon to a bank in exchange for the interest payment.