Bonds: What they are and what they are not

What are bonds? Simply put a bond is a piece of a huge loan. Huge because they are loans made to big organizations, corporations or even national governments. This kind of entities involved most times are so big that borrowing from one source alone might not produce sufficient money for them. So basically, a bond is a loan lent to a large organization.

So if bonds investments are basically like borrowing money to a company why is it not just called a “loan”? Because bonds are actually types of investments. It’s a kind of investment where rather than buy a something from the entity like a shares, the investor lends the company money by buying the bonds issued by the said entity. People who own bonds are referred to as debtholders or creditors of the issuer of said bonds. For example if you bought bonds from a corporation, you are the said corporations’ debtholder or creditor.

Terms with Bonds Investments

  • Issue Price: This is the price or rate at which the bonds was initially or originally sold by the bond issuer.
  • Maturity Date: This is the date or day the bond will mature and the bond issuer would have to pay the bond holder the face value of the bond. Bond maturities are not fixed or standardized, they can range from a day to as long as 40 years or more. The longer dated the maturation is, the less liquid the bond is.
  • Coupon Rate: This is the rate of interest the bond issuer has to pay on the face value of the bond.
  • Face Value: This is the amount of money the bond will be worth when it matures. It is also used as the reference amount or value when calculating interest payments.
  • Coupon Dates: This is the dates set for the bond issuer to pay the interests accrued thus far on said bonds.

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Who issues the Bonds?

Companies: Bonds issued by companies are called corporate bonds.

States and Municipalities: Bonds issued by these entities are called Municipal bonds. They sometimes come with tax-free coupons for residents of the said municipalities.

Types of Bonds Investments

  • Zero-Coupon bonds: This type of bonds are issued at a discount and with time grow to their face value upon maturation.
  • Convertible bonds: This type of bond allows bondholders to convert the bonds into stocks if the share price rises to a certain suitable level.
  • Callable and Putable bonds: Callable bonds are bonds that can be called back from the debtholders if the interest rates drop suitably. Putable means the debtholders can put the bonds back to the issuer if interest rates rise suitably.

When or Why are bonds issued?

  • When a company or entity needs to raise money to fund a new project or to keep up with ongoing operations.

When bonds are issued the terms are always clear and all laid out. The interest rates are stated, as also the maturity of the said bond.

The market value of a bond depends on factors like the credit quality of the issuer, how long the bond would run until it expires and the interest rate when placed beside the general interest rate of the environment at the time.

Summarily, bonds as earlier stated, are loans made out to organizations with the borrowing party promising to pay the it back at a set date. Until the set date, the debt holder is entitled to interest payments from the borrowing organization. And in the case that the said organization goes bankrupt, bondholders are given priority over even shareholders of the said organization.