BOND

WHAT IS BOND?

 A bond is a fixed income investment in which an investor loans money to an entity (typically corporate or governmental) which borrows the funds for a defined period of time at a variable or fixed interest rate. Bonds are used by companies, municipalities, states and sovereign governments to raise money and finance a variety of projects and activities. Owners of bonds are debt holders, or creditors, of the issuer. it is uniform asset class than stocks it is a fixed income securities and we study about this topic in fixed income fundamentals bonds are mainly used for the raising capital for the company for new projects and other investment 

 

EXAMPLE

  if a bond is issued when prevailing interest rates are 5% at $1,000 par value with a 5% annual coupon, the bondholder will be credited $50 in interest income annually. The bondholder would be indifferent to purchasing the bond or saving the same money at the prevailing interest rate.

CHARACTERISTICS OF BOND

Face value is the money amount the bond will be worth at its maturity, and is also the reference amount the bond issuer uses when calculating interest payments. For example, say an investor purchases a bond at a premium $1,090 and another purchases the same bond at a discount $980. When the bond matures, both investors will receive the $1,000 face value of the bond

Coupon rate is the rate of interest the bond issuer will pay on the face value of the bond, expressed as a percentage. For example, a 5% coupon rate means that bondholders will receive 5% x $1000 face value = $50 every year

Coupon dates are the dates on which the bond issuer will make interest payments. Typical intervals are annual or semi-annual coupon payments.

Maturity date is the date on which the bond will mature and the bond issuer will pay the bond holder the face value of the bond.

Issue price is the price at which the bond issuer originally sells the bonds.