Business
Bonds
Bonds are debt securities issued by companies or governments to raise capital. Investors who purchase bonds are essentially lending money to the issuer in exchange for periodic interest payments and the return of the bond's face value at maturity. Bonds are commonly used by businesses to finance projects, operations, or expansions, and they provide a way for companies to access funding while offering investors a predictable income stream.
Written by Perlego with AI-assistance
Related key terms
1 of 5
10 Key excerpts on "Bonds"
eBook - PDFBond and Money Markets
Strategy, Trading, Analysis
- Moorad Choudhry(Author)
- 2003(Publication Date)
- Butterworth-Heinemann(Publisher)
Reporting the bond yield level reflects the importance of the bond market to a country’s economy, as important as the level of the equity stock market. Bond and shares form part of the capital markets . Shares are equity capital while Bonds are debt capital. So Bonds are a form of debt, much like how a bank loan is a form of debt. Unlike bank loans however Bonds can be traded in a market. A bond is a debt capital market instrument issued by a borrower, who is then required to repay to the lender/investor the amount borrowed plus interest, over a specified period of time. Bonds are also known as fixed income instruments, or fixed interest instruments in the sterling markets. Usually Bonds are considered to be those debt securities with terms to maturity of over one year. Debt issued with a maturity of less than one year is considered to be money market debt. There are many different types of Bonds that can be issued. The most common bond is the conventional (or plain vanilla or bullet ) bond. This is a bond paying regular (annual or semi-annual) interest at a fixed rate over a fixed period to maturity or redemption, with the return of principal (the par or nominal value of the bond) on the maturity date. All other Bonds will be variations on this. A bond is therefore a financial contract, in effect an IOU from the person or body that has issued the bond. Unlike shares or equity capital, Bonds carry no ownership privileges. An investor who has purchased a bond and thereby lent money to an institution will have no voice in the affairs of that institution and no vote at the annual general meeting. The bond remains an interest-bearing obligation of the issuer until it is repaid, which is usually the maturity date of the bond. The issuer can be anyone from a private individual to a sovereign government. 1 There is a wide range of participants involved in the bond markets.
eBook - PDF- Moorad Choudhry, Graham "Harry" Cross, Jim Harrison(Authors)
- 2003(Publication Date)
- Butterworth-Heinemann(Publisher)
The issuer can be anyone from a private individual to a sovereign government. There is a wide range of participants involved in the bond markets. We can group them broadly into borrowers and investors, plus the institutions and individuals who are part of the business of bond trading. Borrowers access the bond markets as part of their financing requirements; hence borrowers can include sovereign governments, local authorities, pub-lic sector organisations and corporates. Virtually all businesses operate with a financing structure that is a mixture of debt and equity finance. The debt finance may well contain a form of bond finance, so it is easy to see what an important part of the global economy the bond markets are. The different types of Bonds in the market reflect the different types of issuers and their respective requirements. Some Bonds are safer investments than others. The advantage of Bonds to an investor is that they represent a fixed source of current income, with an assurance of repayment of the loan on maturity. Bonds issued by developed country governments are deemed to be guaranteed investments in that the final repayment is virtually certain. In the event of default of the issuing entity, bondholders rank above shareholders for compensation payments. There is lower risk associated with Bonds compared to shares as an investment, and therefore almost invariably a lower return in the long term. We can now look in more detail at some important features of Bonds. 2.1 Description We have said that a bond is a debt instrument, usually paying a fixed rate of interest over a fixed period of time. Therefore a bond is a collection of cash flows and this is illustrated at Figure 2.1. In our hypothetical example the bond is a six-year issue that pays fixed interest payments of C% of the nominal value on an annual basis.
eBook - PDF- Roy E. Bailey(Author)
- 2005(Publication Date)
- Cambridge University Press(Publisher)
12.1 What defines a bond? The prototypical bond is a contract that commits the issuer to make a definite sequence of payments until a specified terminal date. For example, the issuer might promise to pay $100 per annum from the present until 30 June 2025, at which time the contract will terminate with a lump sum payment of $1000. An important characteristic of many Bonds is that they are commonly bought and sold in secondary markets. In this context, Bonds are a special form of loan, which is commonly an agreement between two parties (borrower and lender) that is typically not traded with anyone else. Also, Bonds are often long-lived; e.g. twenty or more years from the date of issue is not uncommon. While, in principle, Bonds can be issued by anyone, in practice they are issued by governments, their agencies (including supranational bodies, such as the World Bank) and incorporated companies. For companies, Bonds provide a way of acquiring capital at a known cost, without sacrificing rights of control over the company if the terms of the contract are fulfilled. In the example above, 30 June 2025 is called the maturity date , the lump sum of $1000 is called the face value (or ‘maturity value’, or ‘principal’) and the sequence of $100 payments are known as coupons . Sometimes the bond would be referred to as a ‘10% bond’, because $100 is 10 per cent of $1000. But, note carefully, there is no particular reason to suppose that the rate of return on the Bond markets and fixed-interest securities 283 bond – however measured – equals 10 per cent. Various ways of defining the rate of return are described in the following sections. The remainder of this section outlines some of the important characteristics that serve to differentiate one bond from another. Bonds can be, and often are, quite complex financial instruments, with all sorts of provisions written into the formal contract – known as the bond’s indenture .
eBook - ePubInvesting in Fixed Income Securities
Understanding the Bond Market
- Gary Strumeyer(Author)
- 2012(Publication Date)
- Wiley(Publisher)
Chapter 11
Corporate Bonds
Michael Bruno, Gary StrumeyerO ver the past number of years we have seen a steady increase in the holdings of corporate Bonds by retail investors. This phenomenon is more than just an increase in mutual fund purchases. Rather, it is indicative of the individual investor purchasing corporate Bonds directly from friendly bond brokers. According to the Federal Reserve, the percentage of household assets in corporate and foreign Bonds grew 70 percent between 1995 and 1999. It is surprising that U.S. households now hold more corporate and foreign debt than they do municipal Bonds, commonly thought of as the retail investor’s safe haven.By purchasing Bonds directly, the investor is in fact cutting out the middleman, avoiding the annual management fees charged by funds and money managers alike. However, there is no free lunch. The investor is now charged with understanding and navigating this complex marketplace. Upon completing this chapter the reader will be on his or her way to becoming an educated and successful corporate bond investor.WHAT IS A CORPORATE BOND?
Like governments and governmental agencies, corporations of all sizes and types issue public debt. Many corporations take advantage of private issuance and sell certain bond issues directly to large, financially sophisticated organizations such as life insurance companies and pension funds. These transactions are registered with the Securities and Exchange Commission (SEC) differently from the way public Bonds are issued and sold. Such issues are regulated under Rule 144A of the SEC.The holder of a corporate bond typically expects the company that issued the bond to make regular interest payments (the coupon) and to repay the principal amount of the loan (the par amount) when the bond matures. Under the terms of the bond offering, the corporation is obligated to make these payments. Compared to the corporation’s stockholders, its bondholders have a priority claim over the assets of the corporation. Legally, the corporation must pay its bondholders the promised coupon interest on all of its outstanding Bonds before any funds are declared as dividends to stockholders. From that point, the holders of the corporation’s preferred stock, if any has been issued, have priority over the holders of its common stock. This fact often leads the corporation’s less sophisticated bondholders to falsely believe they will always receive their promised interest payments and principal.
eBook - PDF- (Author)
- 2022(Publication Date)
- Wiley(Publisher)
We will also follow this convention, and where any nuance of meaning is intended, it will be made clear. Moreover, the term “fixed income” is not to be understood literally: Some fixed-income securities have interest payments that change over time. 1.1. Overview of a Fixed-Income Security A bond is a contractual agreement between the issuer and the bondholders. Three important elements that an investor needs to know about when considering a fixed-income security are: • The bond’s features, including the issuer, maturity, par value, coupon rate and frequency, and currency denomination. These features determine the bond’s scheduled cash flows and, therefore, are key determinants of the investor’s expected and actual return. • The legal, regulatory, and tax considerations that apply to the contractual agreement between the issuer and the bondholders. • The contingency provisions that may affect the bond’s scheduled cash flows. These contin- gency provisions are options providing either issuers or bondholders certain rights affecting the bond’s disposal or redemption. This section describes a bond’s basic features and introduces yield measures. The legal, regulatory, and tax considerations and contingency provisions are discussed in subsequent sections. Chapter 1 Fixed-Income Securities: Defining Elements 5 1.1.1. Basic Features of a Bond All Bonds, regardless of issuer, are characterized by the same basic features, which include maturity, par or principal amount, coupon size, frequency, and currency. 1.1.1.1. Issuer Many entities issue Bonds: private individuals, such as the musician David Bowie; national governments, such as Singapore or Italy; and companies, such as BP, General Electric, or Tata Group. Bond issuers are classified into categories based on the similarities of these issuers and their characteristics.
eBook - PDF- Scott Besley, Eugene Brigham, Scott Besley(Authors)
- 2021(Publication Date)
- Cengage Learning EMEA(Publisher)
Because they are negotiated di- rectly between the lender and the borrower, formal docu- mentation is minimized. The key provisions of a term loan can be worked out much more quickly than can those for a public issue, and it is not necessary for the loan to go through the Securities and Exchange Commission (SEC) registration process because it is not sold to the public. In addition, unlike typical corporate Bonds that have many different bondholders, a company often can sit down with the lender in a term loan arrangement and work out mu- tually agreeable modifications to the contract if necessary. The interest rate on a term loan either can be fixed for the life of the loan or it can be variable. Bonds. A bond is a long-term contract under which a borrower (issuer) agrees to make payments of interest and principal on specific dates to the bondholder (in- vestor). The interest payments are determined by the coupon rate, which represents the total interest paid each year stated as a percentage of the bond’s face value. Typically, interest is paid semiannually, although Bonds that pay interest annually, quarterly, and monthly also ex- ist, and the principal amount is generally paid in a lump- sum amount at the end of the bond’s life (maturity date). Some of the more common Bonds issued by both governments and corporations are listed below. 1. Government Bonds are issued by the U.S. government, state governments, and local or munici- pal governments. U.S. government Bonds are issued by the U.S. Treasury and are called either Treasury notes or Treasury Bonds. Both types of debt pay inter- est semiannually. The primary difference between Treasury notes and Treasury Bonds is their original maturities. T-notes are issued with ma- turities of two years, three years, five years, seven years, or 10 years, whereas the original maturities on T-Bonds are 20 years or 30 years.
- Edwin J. Elton, Martin J. Gruber, Stephen J. Brown, William N. Goetzmann(Authors)
- 2013(Publication Date)
- Wiley(Publisher)
Corporate Bonds Corporate Bonds are generally similar to government Bonds in pay- ment pattern. They promise to pay interest at periodic intervals and to return principal at a CHAPTER 2 FINANCIAL SECURITIES 15 4 Treasury Bonds issued after 1985 do not contain call provisions. 5 The tax implications of different coupon rates can also explain differences in yield; this will be discussed in later chapters. Taxable equivalent yield = Tax exempt municipal yield 1 Marginal tax rate - - fixed date. The major difference is that these Bonds are issued by business entities and thus have a risk of default. Corporate Bonds are rated as to quality by several agencies, the best known of which are Standard and Poor’s and Moody’s. 6 Corporate Bonds differ in risk not only because of differences in the probability of default of the issuing corporations but also because of differences in the nature of their claims on the assets and earnings of the issuing corporations. For example, secured Bonds have spe- cific collateral backing them in the event of bankruptcy, whereas unsecured corporate Bonds (called debentures) do not. An additional class of Bonds called subordinated debentures not only have no specific collateral but also have a still lower priority claim on assets in the event of default than unsubordinated debentures. In an attempt to gain some protection against bankruptcy, corporate Bonds typically place certain restrictions on management behavior as part of the loan agreement (called the bond indenture). Such restrictions might include limiting the payment of dividends or the addition of new debt. Another notable feature of corporate Bonds is that they are most often callable, which means that corporations can force the holder of the bond to surrender them at a fixed price (usually above the price at which the Bonds were initially sold) during a set period of time.
- Dimitris N. Chorafas(Author)
- 2005(Publication Date)
- Butterworth-Heinemann(Publisher)
62 The Management of Bond Investments and Trading of Debt 3.5 Yield of fixed income instruments and the ECB model This is only a preliminary discussion on yield (for a detailed discussion on yield and yield curves see Chapter 7 and Chapter 9) intended to bring to the reader’s attention the fact that yield is not necessarily the same with nominal interest. Furthermore, publicly traded debt instruments may have a fixed interest rate or a variable one, the latter being known as floating interest rate. Because the fixed interest rate is by far the more frequently used, Bonds are generally known as fixed income instruments. Being active in the fixed income business means to originate, trade, and distribute a variety of debt-based instruments, including structured ones. It also means being responsible for loan syndication and for administering a loan portfolio – which may or may not be securitized. When it is managed at that broad scale, the fixed income business serves a wide client base of investors and borrowers, offering a range of fixed income services which: The underwriting of debt instruments, and their sale to individual investors, insti-tutional investors, and other entities Principal finance, which involves the purchase, origination, and securitization of credit instruments, and A variety of derivative banking products, from structured finance to other lever-aged financial instruments. Interest rate-based credit products, from government Bonds and corporate Bonds to securitized loans, are subject to market acceptance and the market’s mood expressed through implied bond market volatility (see section 3.4). This may be shorter term or longer term. Also short term and longer term may be the pattern of bond yields and rising or falling prices. The yield of a security is a basic metric for valuation as far as its return to the investor is concerned. Fixed income securities are sold at a price which, to a significant extent, is established by the market.
eBook - PDF- Janette Rutterford, Marcus Davison(Authors)
- 2017(Publication Date)
- Red Globe Press(Publisher)
Part II Bonds and Fixed Income Chapter 3 Bonds and government securities 68 Chapter 4 Bond strategies 102 CHAPTER CONTENTS Introduction to Bonds 68 History of UK government Bonds 70 Description of UK government Bonds 75 Calculation of bond returns 85 The gilt market and players 95 Summary 100 Review exercises 100 3 Bonds and government securities Learning objectives for this chapter After studying this chapter you should be able to ❍ classify debt securities according to their basic characteristics including coupon and maturity ❍ calculate prices and returns on different types of UK government Bonds ❍ describe the principal mechanisms of the UK government bond market ❍ use your understanding of the UK government bond market to analyse another country’s bond market. INTRODUCTION TO Bonds Chapters 3 and 4 are devoted to a detailed description and analysis of debt securities: that is, securities that give the holders a contractual and legally enforceable right to certain future payments by the issuer. The generic term for these securities – Bonds – emphasises the legal commitment of the issuer to make those payments, regardless of its ability or willingness to pay or of external market conditions. Bonds come in many different forms. Here are brief descriptions of the types you will most frequently encounter in practice. In the simplest and also the commonest case, the exact amounts and timings of all the bond payments are fixed at the time of original issue. A company issuing a £100 million 10% bond for five years is taking on an obligation to pay £10 million in interest on each of the first four anniversaries of the issue (or perhaps £5 million every half-year), plus a final interest payment and repayment of the original £100 million principal on the fifth anniversary. Such issues are referred to as straight Bonds or just straights , or – even more colloquially – plain vanilla Bonds .
eBook - PDF- Patrick J. Brown(Author)
- 2006(Publication Date)
- Wiley(Publisher)
On the other hand, it is possible that you know and like the issuer but a further investment in the company debt will give you too great an exposure. Where is the issue going to be quoted and traded? Many bond issues are not quoted on an exchange in the way that equity issues are. If you look at the eurobond or international bond market, you will see that for various regulatory reasons many of them are nominally quoted on the Luxembourg Stock Exchange. However, very few of them have ever been traded on the exchange. All dealing is conducted off-exchange directly with market makers. Although the bond market is a global market place, there is still an investor preference for local Bonds. For example, the relative ratings of World Bank and European Investment Bank Bonds, where both institutions have the highest possible credit rating, are slightly different on different sides of the Atlantic. What is the security offered by the issuer of the loan? Companies often tend to divide their debt into different categories, which offer different levels of protection in the event of the company going through hard times. For example, a company might have divided the debt into the following categories: secured loans, senior unsecured loans and subordinated unsecured loans. In the event of a problem, the issuer will stop paying interest on all the subordinated unsecured loans before the position of the senior unsecured loans and the secured loans is considered. If the Company defaults on the interest payments or capital repayments of the secured loans, the loan holders have a right to the asset on which the loan was secured. This could be a property and could be worth more than the capital lost. Many euroBonds just specify in their prospectus a ‘negative pledge’. As discussed later, this is just a pledge not to issue Bonds in the future with a prior call on the assets of the company.
Index pages curate the most relevant extracts from our library of academic textbooks. They’ve been created using an in-house natural language model (NLM), each adding context and meaning to key research topics.
