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Bond

lastmod 2020-09-22created 2020-09-221 edits

In finance, a bond is a type of security: a debt security that represents a claim to payment. An authorized bond issuer owes a debt to the bondholder for a fixed contract period and must pay the holder the principal and coupon (interest) at the maturity date. In other words, it is a form of contract promising to repay borrowed money and interest within a set period. A bond is therefore similar to a loan: the issuer is the borrower, the holder is the lender, and the coupon is the interest that comes with it. Through bonds, a debtor can obtain external funding needed for long-term investment, as with government and public bonds, and can also fund current expenditures. Certificates of deposit (CD) and commercial paper (CP) are regarded not as bonds but as money market instruments.

Bonds and stocks are both securities, but there are differences. A stockholder is a shareholder of the company and has a degree of ownership, while a bondholder is merely a creditor. Another difference is that bonds usually have a fixed term and therefore a maturity, whereas stocks can function almost permanently. The console bond is an exception: this bond has no maturity. Bonds are classified by terms of maturity, credit risk, tax treatment, and so on.

Etymology

The English word 'bond', meaning a debt instrument, comes from 'bind'. Since at least the 1590s, the word 'bond' has been used in the sense of 'an instrument binding one to pay a sum to another'.

Features

Principal
The nominal value or face value is the basis for the interest the issuer pays, and normally must be paid at the end of the bond's term.
Maturity
When a bond reaches maturity, the bondholder can receive the principal and coupon, that is, the principal and interest.

Types

  • By issuer : government bonds, municipal bonds, special bonds, Monetary Stabilization Bonds, financial bonds, corporate bonds, foreign bonds
  • By interest payment method : coupon bonds, discount bonds, compound interest bonds, simple interest bonds, deferred installment redemption bonds
  • By redemption period : short-term bonds, medium-term bonds, long-term bonds
  • By offering method : private placement bonds, public offering bonds
  • By guarantee : guaranteed bonds, non-guaranteed bonds
  • By whether the coupon rate is fixed : fixed-rate bonds, floating-rate bonds, inverse floating-rate bonds
  • By principal repayment method : lump-sum repayment at maturity bonds, face-value installment redemption bonds
  • By issue price : par issue bonds, discount issue bonds, premium issue bonds

See also

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