Bonds
- A bond is a form of debt with which you are the lender
- A bond is a contractural loan made between investors and institutions that in return for financing, will pay a premium for borrowing (known as a coupon)
- Bonds are 1 of 3 main generic asset classes (stocks and cash equivalents are the other two)
- Corporate and goverment bonds are often publicly traded on exchanges
- Some bonds are traded only over-the-counter (OTC)
Why trade bonds instead of stocks
- stocks and bonds differ in structure, payout, returns and risks.
- bonds are contractural loans made between two parties
- stocks represent participation in a company’s growth and give no promise about returns
- less risk with bonds (potentially less return)
- predictable coupon payments from bonds (provided the company stays solvent)
Terms with Bonds
Face Value - the money amount the bondy will be worth at its maturity and the reference amount when interest payments are calculated
Coupon rate - rate of interest the bond issues will pay on the face value of the bond
Coupon dates - dates on which the bond issuer will make interst payments (typically annual or semi-annual)
Maturity date - the date on which the issuer will pay the bond holder the face value of the bond
Issue Price - the price at which the bond issuer originally sells the bonds
Varieties of Bonds
- Zero coupon bonds - do not have coupon payments, you eventually make your money on maturity
- Convertible bonds - debt instruments with an embedded call option that allows bondhodlers to conver their debt into stock at some point if the share price rises to a sufficiently high level to make such a conversion attractive.
- Callable bonds - company can call back the bonds from debt holders if interst rates drop sufficiently.
- Putable bonds - creditors can put the bondy back to the issuer if interest rates rise sufficiently.