Bonds are fixed-income instruments, and in basic terms, represent a loan made by an investor to a borrower who in most cases will either be a country’s government or a corporate entity. Bonds are utilized by governments and corporate entities to raise capital to finance operations or major projects. The owners of the bonds are classed as creditors of the issuer.
Bond information will always include the end date of the bond, when the sum borrowed (the principal) is scheduled to be repaid, and also the rate of interest that is paid on the bond.
Most government and corporate bonds can be publicly traded but some are only tradable between the issuer and the borrower of the bond, these are commonly known as over-the-counter bonds (OTC).
Bonds will be released for a standard price commonly £100 or £1000 which is known as the par price and on redemption of the bond, this is the value which the holder of the bond is entitled to receive from the issuer of the bond. During the lifetime of the bond, the holder (at the payment date) will receive the coupon rate of interest that is stated on the bond. For example, if the bond has a 5% coupon rate and a holder, owns one £1000 bond they will be entitled to receive £50 of interest on the coupon payment date.
Prices of bonds will fluctuate in the marketplace depending on various factors including the length of time until maturity of the bond, credit quality of the issuer, and the coupon rate applicable to the bond compared to other interest rates available at the current time.
Key takeaways:
- Bonds are used by governments and corporate entities to raise capital for major projects or operations.
- Bonds will always display the maturity date (when the principal loan must be repaid) along with the coupon rate (the amount of interest the bond pays) and the coupon date (the date or date at which the coupon rate is paid).
- Bonds are classified as fixed income asset instruments as the most common types of bonds always pay a steady rate of interest. However, there are also variable interest bonds now available for investors.