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Different types of Bonds in Finance & their Meaning

Updated: Apr 27, 2023


What is a Bond in terms of Finance


In finance, bonds are essentially loans that investors make to companies, governments, or other entities. The bond issuer (the borrower) agrees to pay the bondholder (the lender) a fixed interest rate over a set period of time, and then repay the full principal amount when the bond matures.


Types of Bonds in Finance


There are several types of bonds in finance, including:

  1. Government bonds: These are issued by governments and are generally considered to be low-risk investments. Examples include U.S. Treasury bonds and German bunds.

  2. Corporate bonds: These are issued by companies to raise money for various purposes, such as expansion or acquisitions. The interest rates on corporate bonds can vary depending on the perceived creditworthiness of the issuer.

  3. Municipal bonds: These are issued by state and local governments to finance public projects like schools and roads. The interest earned on municipal bonds is typically tax-free, making them popular among investors in higher tax brackets.

  4. High-yield bonds: These are also known as "junk bonds" because they are issued by companies with a lower credit rating and are therefore considered higher risk. The upside is that they often offer a higher interest rate than other types of bonds.

A few Features of Bonds


Here are a few features of bonds:

  1. Maturity Date: This is the date when the bond issuer (borrower) must repay the principal amount to the bondholder (lender). The maturity date can range from a few months to several decades, depending on the type of bond.

  2. Coupon Rate: This is the interest rate that the bond issuer pays to the bondholder. The coupon rate is usually fixed and is expressed as a percentage of the bond's face value. For example, a bond with a face value of $1,000 and a coupon rate of 5% would pay $50 in interest each year.

  3. Face Value: This is the amount that the bond issuer agrees to repay the bondholder when the bond matures. The face value is also known as the "par value" or "principal."

  4. Credit Rating: This is an assessment of the bond issuer's ability to repay its debts. Credit rating agencies like Moody's and Standard & Poor's assign ratings ranging from AAA (the highest rating) to D (default). Bonds with higher credit ratings are considered less risky and generally offer lower interest rates, while bonds with lower credit ratings are considered riskier and generally offer higher interest rates.

  5. Yield: This is the total return that an investor earns on a bond, expressed as a percentage of the bond's current market price. The yield takes into account both the coupon rate and the current market price of the bond.

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

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