Bonds
A bond is an agreement between an investor and the company, government, or government agency that issues the bond. When investors buy a bond, they are loaning money to the issuer in exchange for interest and the return of principal at maturity.
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Organisations, including companies, governments, municipalities and other entities, issue bonds for investors in primary markets. The corpus thus collected is used to fund business operations and infrastructural development by companies and governments alike.
Investors purchase bonds at face value or principal, which is returned at the end of a fixed tenure. Issuers extend a percentage of the principal amount as periodical interest at fixed or adjustable rates.
What is a
Bond?
Bonds refer to high-security debt instruments that enable an entity to raise funds and fulfil capital requirements. It is a category of debt that borrowers avail from individual investors for a specified tenure
Organisations, including companies, governments, municipalities and other entities, issue bonds for investors in primary markets. The corpus thus collected is used to fund business operations and infrastructural development by companies and governments alike.
Investors purchase bonds at face value or principal, which is returned at the end of a fixed tenure. Issuers extend a percentage of the principal amount as periodical interest at fixed or adjustable rates.
Individual investors acquiring bonds have legal and financial claims to an organisation’s debt fund. Borrowers are therefore liable to pay the entire face value of bonds to these individuals after the term expires. As a result, bondholders receive debt recovery payments before stakeholders in case a company faces bankruptcy.
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Bonds are units of corporate debt issued by companies and securitized as tradeable assets.
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A bond is referred to as 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.
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Bond prices are inversely correlated with interest rates: when rates go up, bond prices fall and vice-versa.
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Bonds have maturity dates at which point the principal amount must be paid back in full or risk default.
Life Cycle of
Bond
The company issues a bond, also known as bond origination.
The bond can then be purchased by an investor. That investor is loaning money to a company for a specified period of time.
The investor receives regular interest payments from the issuer until the date of maturity. These periodic interest payments are called “coupon payments.” The amount of the coupon payments is determined by the coupon rate, which is expressed as a percentage of the principal.
When a bond matures, the issuer (i.e. company) repays the principal to the investor. Alternatively, investors can sell their bonds before the bond matures.
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1. Bond Origination
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2. Bond is Purchased by an Investor
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3. Coupon Payments
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4. Company Repay the Pricipal
Bonds Vs
Stocks
When a company needs financing, it has the option of using stocks or bonds. A company can go public and make an initial public offering (IPO), selling shares of its company. When someone buys these shares (stock), they are then the legal owner of a portion of that company. In this case, the company has used equity financing.
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With a bond, the investor does not receive equity in the company. The company borrows from the investor, and the investor receives the interest payments and principal of a bond, regardless of how high or low the company’s stock price becomes. In this case, the company has used debt financing.
