Bonds in Finance - Definition
A bond is a type of debt or a loan where the borrower could be a bank, an NBFC or the government and the lender or the investor is any individual or a corporation. The borrower is the one who issues the bonds and the lenders are the investors. The investors purchase these bonds to gain intersests on their capital. A bond has an issue date and a maturity date, at which the complete principle value will be returned back to the investor. The rate of interest given over these bonds is also called coupon rate.
Bond Term | Meaning |
Issuer | Borrower |
Investor | Lender |
Principle, Face Value, Par Value | Amount Borrowed |
Coupon Rate | Interest Rate |
Coupon | Interest Payment |
Maturity | Due Date |
Term | Term Until Maturity/Due Date |
Yield to Maturity | Annualized return on Bond Investment |
Market Value | Current Price |
Key Takeaways / Features / Characteristics
Bonds are rated by credit rating agencies
Bonds have a coupon/interest payment frequency, that is annualy, semi annualy, quarterly or monthly
Bonds can be secured or unsecured
Investors hold bonds till maturity and get their entire principle back
Or these bonds can also be traded in secondary markets (Very less liquidity)
A bond is basically a loan, which an investor provides to a company or a government
The company issuing bonds may also go bankrupt and default on your bonds (however it is uncommon)
Secured bonds maturing in near future can also be kept as collateral for taking loans
Government bonds are safer and provide less interest whereas corporate bonds have more risk and pay higher interest.
Bonds with longer maturity term pay higher interest
Bonds is a Capital Market instrument