Bonds
A bond is a contract in which the borrower returns the borrowed money with interest after certain time interval. A bond is a secure debt in which the issuer holds the debt based on terms and conditions, and repays the debt with interest to the borrower after the maturity date.
Thus in financial terms :
- Issuer: is the debtor, the borrower
- Holder: is the creditor, the lender
- Coupon: is the interest on the capital
Bonds which have to be repaid, provides external funds to the company or organization for long term investment and future growth. In case of government bonds, the borrowed fund finances the current expenditure. Money market instruments such as commercial papers or CDs (certificate of deposit) are not considered bonds. Primary market which is a part of capital market that deals with issuing new securities; issues bonds through supernatural institutions, companies, credit institutions and other public authorities. A bond is mostly processed through underwriting, in which one or more banks or security firms, forms a syndicate and purchases the entire issued bonds and then resells it to the interested investor. In case of Government Bonds, the bonds are issued through auction where the members of private body and bank can bid for the bond. Generally, Government Bond prices are not fixed but coupon is always fixed.
Difference between Bonds and Stocks:
The major difference between bonds and stocks securities lies in their ownership, where the stockholders are the owners of the company and bondholders are the creditors of the company. Another difference lies in the term of association, where the bond has limited time till maturity date after which the bond is redeemed; whereas the stock may outstand for indefinite span.
Types of Bonds:
- Fixed Rate Bonds are the bonds where the coupon is fixed till the maturity.
- Floating Rate Notes (FRN) has a variable coupon which directly depends on the reference rate, which is the rate that is defined in the financial contract outside the control of the parties of the contract.
- Zero Coupon Bonds does not have regular interest and the coupon is effectively rolled till the date of maturity.
- Inflation Linked Bonds are designed to cut down inflation risk of the investment.
- Asset Backed Security is the bond whose principle amount and coupon is backed by cash flow from other assets.
- Subordinate Bonds are the bonds that have lower priority than other bonds.
- Perpetual Bonds are the bonds which do not have maturity date.
- Bearer Bond is the bond which is not named bond holder on the certificate.
- Municipal Bonds are the bonds issued by the US Territory