Bonds
Bonds are debt securities issued by companies or governments to raise capital. Investors who purchase bonds are essentially lending money to the issuer in exchange for periodic interest payments and the return of the bond's face value at maturity. Bonds are commonly used by businesses to finance projects, operations, or expansions, and they provide a way for companies to access funding while offering investors a predictable income stream.
8 Key excerpts on "Bonds"
- Stefano Calicchio(Author)
- 2014(Publication Date)
- Stefano Calicchio(Publisher)
...Bonds Bonds are an attractive option for investors who want to exploit other financial tools in addition to equity securities, due to the fact that the available range is wide and depends on their risk, duration and performance. Although there are different kind of Bonds, we will begin by offering you a general trading definition: they are a debt security under which the issuer owes the owners a debt and, according to the terms of the bond, he is forced to pay him an interest and/or refund him the amount at a later date. We can divide them into different categories according to various types of parameters. For example: • Government Bonds: they are generally quite liquid, although creditworthiness can vary a lot depending on the state or country of issuance; • Corporate Bonds: their interests are characterized by highly variable risk levels depending on the type of business and growth prospects of the issuers; • Different kinds of Government Bonds: in this case the emitters can be a town hall, a province, or a region. There are also other factors that can influence directly and indirectly the prices of debt securities and that investors will have to take into account when they open or manage a position. To simplify, we can quote the following ones: • Interest Rate: They largely determine the performance of Bonds and tend to rise when the price drops; • Duration: The interest rate of decennial Bonds is higher than annual Bonds because the risk is greater; • Issuer Ratings: Although it is difficult to define the absolute value of companies or government agencies that issue a bond, there are many credit rating agencies...
eBook - ePubInterest Rate Markets
A Practical Approach to Fixed Income
- Siddhartha Jha(Author)
- 2011(Publication Date)
- Wiley(Publisher)
...Chapter 2 Bonds Bonds are the starting point for understanding the fixed income market. They represent a standardized form of loan between investors and debt holders and form the foundation of the fixed income market. Although Bonds are traded in massive volume daily, they are less known to the general public than the stock market. Unlike stocks, which have indefinite maturity and uncertain dividends that can be withdrawn at will by the issuer, Bonds have a fixed maturity and fixed interest at inception (or interest that changes according to an agreed-on formula). Furthermore, while stocks are issued mainly by corporations, Bonds have a tremendous variety of issuers, including governments, corporations, and homeowners. This chapter introduces the basic characteristics of Bonds, their valuation, and the risks of investing in them. Even if the borrower of the debt is sure to repay the loan, there are other risks to consider if Bonds are bought and sold in the market. We quantify and attempt to control them, especially when initiating trades beyond simply buying or selling a single bond. BASICS OF Bonds To understand the details of Bonds, first consider a simple case where you lend your friend $5 for a week. In the case of such micro-loans, most of the time the $5 is returned after a week with no adjustment made for interest. However, let's take the example to a larger scale. Assume that you have lent money not to a good friend, but to an institution, such as the government. Also, instead of $5, suppose you have lent $1 million. Finally, instead of a week, suppose the term of the loan is 10 years. In this case, the government promises to return your $1 million after 10 years, probably using it for purposes like defense or social welfare in the meantime. Although lending without interest was okay with the $5 to your friend for a week, this case is obviously very different...
eBook - ePubThe Everything Guide to Investing in Your 20s & 30s
Your Step-by-Step Guide to: * Understanding Stocks, Bonds, and Mutual Funds * Maximizing Your 401(k) * Setting Realistic Goals * Recognizing the Risks and Rewards of Cryptocurrencies * Minimizing Your Investment Tax Liability
- Joe Duarte(Author)
- 2019(Publication Date)
- Everything(Publisher)
...CHAPTER 7 Bonds: The Glue That Holds Financial Markets Together Talk of Bonds is boring at parties, but as an investor you should know that Bonds are the glue that holds the markets together. Think of it this way: without Bonds, the global economy would be a totally different place, one of much slower growth and fewer prospects. In this chapter you’ll learn why Bonds are important and how they make sense for your portfolio. What Is a Bond? A bond is a loan packaged as a marketable security. When investors buy Bonds, they are loaning money to a company, a municipality, or a sovereign government with the expectation that the money will be paid back at a predetermined date in the future along with interest. Bonds usually pay interest to the bondholder, either in installments or as one lump sum when the bond matures. Most pay interest semiannually or annually. You can buy Bonds directly as new issues from the issuer, or you can buy them through traders, dealers, or brokers in the secondary market. The market sets bond prices as supply and demand changes. The major reason investors buy Bonds is usually the interest portion of the bond. In exchange for the loan, the issuer agrees to pay the investor interest at regular intervals as well as return the original investment at maturity. Bonds are usually sold in discrete increments (multiples of $1,000). This is the par value or face value. Bond maturities are divided into short-, intermediate-, and long-term periods. Short-term Bonds mature in less than five years. Intermediate-term Bonds mature in five to ten years, while Bonds with maturities above ten years are considered long-term. Bonds with maturities beyond twenty to thirty years are rare but do exist. Generally, Bonds with the longer maturities pay the highest interest rates due to the higher risk potential. Bond prices and yields (the current effective interest rate) fluctuate based on any current market forces and trends...
eBook - ePubAccounting for Investments, Volume 2
A Practitioner's Handbook
- R. Venkata Subramani(Author)
- 2011(Publication Date)
- Wiley(Publisher)
...Local governments issue municipal Bonds to finance their projects. Corporate entities also issue Bonds or borrow money from a bank or from the public. The term “fixed income security” is also applied to an investment in a bond that generates a fixed income on such investment. Fixed income securities can be distinguished from variable return securities such as stocks where there is no assurance about any fixed income from such investments. For any corporate entity to grow as a business, it must often raise money to finance the project, fund an acquisition, buy equipment or land or invest in new product development. Investors will invest in a corporate entity only if they have the confidence that they will be given something in return commensurate with the risk profile of the company. Bond coupon The coupon or coupon rate of a bond is the amount of interest paid per year expressed as a percentage of the face value of the bond. It is the stated interest rate that a bond issuer will pay to a bond holder. For example, if an investor holds $100,000 nominal of a 5 percent bond then the investor will receive $5,000 in interest each year, or the same amount in two installments of $2,500 each if interest is payable on a half-yearly basis. The word “coupon” indicates that Bonds were historically issued as bearer certificates, and that the possession of the certificate was conclusive proof of ownership. Also, there used to be printed on the certificate several coupons, one for each scheduled interest payment covering a number of years. At the due date the holder (investor) would physically detach the coupon and present it for payment of the interest. Bond maturity The bond’s maturity date refers to a future date on which the issuer pays the principal to the investor. Bond maturities usually range from one year up to 30 years or even more...
- Thomas Herold(Author)
- 2020(Publication Date)
- THOMAS HEROLD(Publisher)
...What are Corporate Bonds? Corporate Bonds are debt securities that a company issues and sells to investors. Such corporate Bonds are generally backed by the company’s ability to repay the loan. This money is anticipated to result from successful operations in the future time periods. With some corporate Bonds, the physical assets of a company can be offered as bond collateral to ease investors’ minds and any concerns about repayment. Corporate Bonds are also known as debt financing. These Bonds provide a significant capital source for a great number of businesses. Other sources of capital for the companies include lines of credit, bank loans, and equity issues like stock shares. For a business to be capable of achieving coupon rates that are favorable to them by issuing their debt to members of the public, a corporation will have to provide a series of consistent earnings reports and to show considerable earnings potential. As a general rule, the better a corporation’s quality of credit is believed to be, the simpler it is for them to offer debt at lower rates and float greater amounts of such debt. Such corporate Bonds are always issued in $1,000 face value blocks. Practically all of them come with a standardized structure for coupon payments. Some corporate Bonds include what is known as a call provision. These provisions permit the corporation that issues them to recall the Bonds early if interest rates change significantly. Every call provision will be specific to the given bond. These types of corporate Bonds are deemed to be of greater risk than are government issued Bonds. Because of this perceived additional risk, the interest rates almost always turn out to be higher with corporate Bonds. This is true for companies whose credit is rated as among the best. Regarding tax issues of corporate Bonds, these are pretty straight forward. The majority of corporate Bonds prove to be taxable, assuming that their terms are for longer than a single year...
- H. Kent Baker, John R. Nofsinger, Andrew C. Spieler(Authors)
- 2020(Publication Date)
- Emerald Publishing Limited(Publisher)
...As a bond investor, you’re lending money to companies, governments, and other entities and receiving interest and the return of principal on your loan. Savvy investors know it pays to be the banker! Many types of bond investments are available, ranging from very safe to very risky. The level of risk is directly related to the quality of the borrower, also known as the issuer. Safe borrowers issue low-risk Bonds with a low interest rate and riskier borrowers issue riskier Bonds with a higher interest rate. Therefore, savvy investors diversify the bond portion of their portfolios by choosing from a broad, global array of sectors, each offering a distinct risk/return profile. Investing in a single bond usually requires more funds than investing in a single share of stock due to a bond’s higher price. So, most investors invest indirectly into a bond portfolio through a mutual fund or exchange-traded fund (ETF) as discussed further in Chapter 5. Bonds are also a cornerstone of retirement plans and pensions plans because they provide steady income. This chapter explains how the bond market works and discusses some basics of bond investing. There are many bond sectors available, but this chapter focuses mainly on investing directly in government and corporate Bonds. Although Bonds are less risky than stocks, they still have risks just like if you lend money to a friend who may forget (or choose not to remember) to pay you back. Not all borrowers repay their loans. You may have received a US government savings bond when you were a kid, now it’s time to learn about the grown-up version. 3.1. WHAT IS A BOND AND ITS MAJOR CHARACTERISTICS? Bonds, also called fixed income, are a special type of loan. A bond issuer borrows money from the lender for a specific time period with a set repayment schedule. The amount borrowed is called the principal (face, maturity, or par value) and the interest paid is called the coupon...
eBook - ePubInvesting in Fixed Income Securities
Understanding the Bond Market
- Gary Strumeyer(Author)
- 2012(Publication Date)
- Wiley(Publisher)
...Furthermore, Bonds can help people gain financial independence without causing them to accept more risk than is necessary or that they can comfortably tolerate. The purpose of this book is to give you an understanding of the risks and rewards of including fixed income securities in your investment portfolio. This book will help you: Take an active role in managing risk in your fixed income portfolio. Apply various valuation methods to a variety of fixed income instruments. Learn essential bond market concepts and terminology. Learn how to maximize after-tax earnings. Utilize economic statistics to forecast the direction of interest rates. Gain a better understanding of the primary debt instruments. DEBT VERSUS EQUITY Understanding how fixed income investments are best incorporated into your portfolio strategy requires knowing the basic differences between debt instruments (Bonds) and equities (stocks). Simply stated, a debt instrument is a contractual or legal obligation of the issuer to pay you, the bondholder-investor, a predetermined rate of interest over the life of the security and, even more important, to repay the principal at the maturity date. Equities are not obligations of the issuer; rather they are ownership interests, which increase and decrease in value based on the issuer’s business success or failure. Bond interest payments are contractual periodic payments, unlike stock dividends, which are paid when and if the company so chooses. As bond payments are legal obligations, any failure to meet those obligations can have dire financial consequences for the issuer. If a corporate borrower failed to meet scheduled interest or principal payments, such a default could potentially force the borrower into bankruptcy. Credit defaults resulting in a bankruptcy are not frequent occurrences. However, if a company were to go bankrupt, bondholders are at the top of the list of creditors who must be paid from corporate assets...
eBook - ePubThe Handbook of Traditional and Alternative Investment Vehicles
Investment Characteristics and Strategies
- Mark J. P. Anson, Frank J. Fabozzi, Frank J. Jones(Authors)
- 2010(Publication Date)
- Wiley(Publisher)
...CHAPTER 4 Bond Basics In its simplest form, a bond is a financial obligation of an entity that promises to pay a specified sum of money at specified future dates. The payments are made up of two components: (1) the repayment of the amount of money borrowed and (2) interest. The entity that promises to make the payment is called the issuer of the security or the borrower. We provide the basic features of Bonds and the risks associated with investing in this asset class in this chapter. In subsequent chapters we provide details on specific sectors of the bond market. FEATURES OF Bonds In the following sections, we describe the basic features of Bonds. Maturity Unlike common stock, which has a perpetual life, Bonds have a date on which they mature. The number of years over which the issuer has promised to meet the conditions of the obligation is referred to as the term to maturity. The maturity of a bond refers to the date that the debt will cease to exist, at which time the issuer will redeem the bond by paying the amount borrowed. The maturity date of a bond is always identified when describing a bond. For example, a description of a bond might state “due 12/15/2025.” The maturity of a bond is used for classifying two sectors of the market. Debt instruments with a maturity of one year or less are referred to as money market instruments and trade in the money market. What we typically refer to as the “bond market” includes debt instruments with a maturity greater than one year. The bond market is then categorized further based on the bond’s term to maturity: short-term, intermediate-term, and long-term. The classification is somewhat arbitrary and varies amongst market participants...
