20 February, 2024

Bonds: debt security

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A bond is a debt security issued by a company, municipality, or government entity to raise capital. When an entity issues a bond, it is essentially borrowing money from investors. Bonds are considered fixed-income securities because they typically pay a fixed amount of interest to bondholders over a specified period of time.

Here are some key features of bonds:

Face Value: Also known as the par value or principal, the face value is the amount that the bond issuer promises to repay to the bondholder upon maturity.

Coupon Rate: The coupon rate is the fixed interest rate that the issuer agrees to pay to the bondholder. It is usually expressed as a percentage of the bond’s face value. For example, if a bond has a face value of $1,000 and a coupon rate of 5%, the bondholder will receive $50 in interest annually.

Maturity Date: The maturity date is the date on which the bond reaches its full term, and the issuer repays the face value to the bondholder. Bond maturities can range from a few months to several decades.

Yield: The yield represents the return an investor can expect to earn from a bond. It takes into account the bond’s price, coupon rate, and time remaining until maturity.

Credit Rating: Bonds are typically assigned credit ratings by credit rating agencies, such as Standard & Poor’s, Moody’s, or Fitch. These ratings assess the issuer’s creditworthiness and the likelihood of timely interest and principal repayments. Higher-rated bonds are considered less risky and often offer lower interest rates, while lower-rated bonds carry higher interest rates to compensate for the increased risk.

Secondary Market Trading: Bonds can be bought and sold on the secondary market before their maturity date. The market value of a bond may fluctuate based on changes in interest rates, creditworthiness of the issuer, and other market factors.

Bonds provide a way for investors to generate income and diversify their investment portfolios. They are generally considered less risky than stocks because bondholders have a higher claim on the issuer’s assets in the event of bankruptcy. However, the risks associated with bonds can vary depending on the creditworthiness of the issuer and prevailing market conditions.

Summary 

A bond is a debt security issued by a company, municipality, or government entity to raise capital. Bonds are considered fixed-income securities because they pay a fixed amount of interest to bondholders over a specified period. Key features of bonds include face value, coupon rate, maturity date, yield, credit rating, secondary market trading, and market conditions. Bonds are typically assigned higher ratings by credit rating agencies, assessing the issuer’s creditworthiness and the likelihood of timely interest and principal repayments. Higher-rated bonds are considered less risky and offer lower interest rates, while lower-rated bonds carry higher interest rates to compensate for increased risk. Bonds provide investors with income and diversify their investment portfolios, but their risks can vary depending on the issuer’s creditworthiness and market conditions.

sukhmandeep
sukhmandeep

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