Bond

A financial instrument in which is taken from an institution for a specific and fixed time is called Bond.
Bonds are usually issued by the borrower and money is raised from investors who want to lend their money for a fixed time period.
Buying a bond is just like lending money from the issuing authority. The bond issuer may be a corporation, a municipality or a government.
During the Bond period, the issuer assures you to a specified amount of interest which is also called face value or par value of the bond, when it “matures,” or comes due after a set period of time.
Bonds are commonly used by governments and corporations for borrowing money for the funding of roads, schools, dams, or other infrastructure.
Corporations are supposed to improve and grow their business, to buy property and equipment, to undertake profitable projects, for research and development, or to hire employees by issuing the bonds.
A bond is actually a fixed-income instrument since bonds traditionally paid a fixed interest rate (coupon) to debtholders. Variable or floating interest rates are also now quite common.
Bonds are the most common type of fixed-income security, but others include CDs, money markets, and preferred shares.
Depending on the type of institution from where you lend the bond, there are four varieties of the bonds.


  • Corporate bonds: Companies issue the corporate bonds. Companies issue bonds rather than seek bank loans for debt financing in many cases because bond markets offer more favorable terms and lower interest rates.

  • Municipal bonds: The bonds issued by the state and municipalities are known as Municipal bonds. Some municipal bonds offer tax-free coupon income for investors.

  • Government bonds: The bonds which are issued by the U.S. Treasury. Bonds issued by the Treasury with a year or less to maturity are called “bills”; bonds issued with 1–10 years to maturity are called “notes”; and bonds issued with more than 10 years to maturity are called “bonds”. The entire category of bonds issued by a government treasury is often collectively referred to as “Treasuries.” Government bonds issued by national governments may be referred to as sovereign debt.

  • Agency bonds: The bonds issued by government-affiliated organizations such as Fannie Mae or Freddie Mac.


Owners of bonds are debtholders , or creditors, of the issuer.
The bond will contain details of its interest rate (known as its coupon) from the outset.
Since your initial investment is returned to you after the period of the bond expires (called the maturity date), this is the only profit that bonds pay.
Bond values are set at a par, typically either $100 or $1000.
This indicates the face value, or the amount that the initial investment will be worth at the bond’s maturity. Interest rates are a calculation of the credit status of the issuer and the duration of the loan.
Bond prices are inversely correlated with interest rates: when rates go up, bond prices fall and vice-versa.
Bonds have maturity dates at which point the principal amount must be paid back in full or risk default.

 

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