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BOND

Definition Explanation Bond terminology How bond work? Types of bonds

TABLE OF CONTENTS

BOND is a debt instrument in which an investor loans money to an entity (corporate or governmental) that borrows the fund for a defined period of time at a fixed interest rate.

WHILEPrize bond is a lottery bond a non interest bearing security issued to public.

Definition:

• Bond is a debt security in which authorized issuer owes the holders a debt.

• It is a formal contact to repay borrowed money with interest at fixed intervals.

• Plays an important role in mobilization of capital.

Explanation:

FACE VALUE: The price of a bond when first issued.

COUPON RATE: The periodic interest payments promised to bondholders are a fixed percentage of bonds face value OR simply the interest rate.

MATURITY: The time until the principal is scheduled to be repaid.

Bond terminology:

CALL PROVISIONS: some bonds contain a provision which enables the issuer to buy the bond back from the bondholder at a pre-specified price.

PUT PROVISION: Some bonds contain a provision due to which the buyer can sell the bond at a pre-specified price before its maturity date.

Bond terminology: cont..

How bonds work?

BONDS ISSUED ( GOVT/

CORPORATION)

FOR A SPECIFIED PERIOD

INTEREST RATE APPLIEDRETURNED AT

MATURITY DATE

( depend)

TYPES OF BONDS

TREASURY BONDS: issued by US govt. to finance its deficits. These are free of default risk.

CORPORATE BONDS: Issued by corporation. There is a high risk because of a company defaulting.

• CONVERTIBLE BONDS: These bonds can be converted into a certain number of shares of the same company at some fixed ratio in a particular date.

• CALLABLE BONDS: contain a provision that gives the issuer the right to call back the bond before its maturity date.

Types of b0nds:

SECURED BONDS: have specific assets of the issuer pledged as collateral for the bond. A bond can be secured by real estate or other assets.

UNSECURED BONDS: are not backed by any specific asset of issuer. More easily issued by a company that is financially sound.

GOVERNMENT BONDS: issued by govt. in its own currency risk free bonds. When issued in foreign currency then a referred as

sovereign bonds.

Types of bonds:

TERM BONDS: That mature at a single specified future date.

SERIAL BONDS: Bonds that mature in installments.

INFLATION LINKED BONDS: It provides protection against inflation and is designed to cut out the inflation risk of an investment.

EXTENDIBLE & RETRACTABLE BONDS: Have no fixed maturity date. Extendible can be extended on demand of buyer while in retractable the date can be reduced.

Types of bonds:

ZERO COUPON BONDS: a type of bond that makes no coupon payments but instead is issued at a considerable discount to par value.e.g: zero coupon bond with 1000$ par value and 600$ to 10 years maturity date. You’d be paying 600$today for a bond worth 1000 in 10 years.(longer the maturity period lesser would be the issue price vice versa).

Types of bonds:

Apart from the benefits of investment in bonds there are also some risks subjected to bonds such as :

• inflation risk, interest rate risk, foreign exchange risk and call back risk etc

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