Bonds are debt investment instruments through which investors give out loans to
government and corporate entities. The latter borrow funding at fixed interest and
for a specified period. Bonds are a main asset class, together with cash equivalents
and stocks. They also fall under the category of fixed-income securities. The issuer
or the indebted entity issues bonds with certain interest rate, which are payable
at the maturity date of the bond principal (the loaned money). Bonds earn interest
which is typically paid semi-annually, i.e. twice a year.
Basically, a bond is similar to a loan, whereby the holder is a creditor and the
issuer is debtor. The funds can be used to finance current expenditure, e.g. government
bonds, or long-term investments. Three features of bonds should be mentioned, the
bond principal, nominal, and face amount, on which borrowers pay interest. The redemption
amount of some structured bonds may differ from the face amount. The redemption
amount may be also linked to certain assets and their performance, such as a foreign
exchange, commodity or stock index, or fund. Because of this, investors may receive
more or less than what they originally invested.
The price at which bonds are bought by investors when issued is called issue price.
It is usually roughly equal to the nominal amount. Issuers receive net proceeds
in the form of the issue price, minus the issuance fees. The date of maturity is
the date on which the nominal amount is to be repaid by the issuer. In case the
issuer has made all payments, it does not have any obligations to the bond holders.
Bonds vary with regard to maturities. For example, some bonds have a maturity of
one hundred years, and some will never mature. Maturity is one factor that determines
the type of security. Bonds are long-term instruments with maturities of over 12
years while notes are medium term instruments with maturities in the range of 6
– 12 years.
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