What are Bonds ?
Why Investment is Important ?
Every individual needs to put some part of his income into something which would benefit him in the long run. Investment is essential as unavoidable circumstances can arise anytime and anywhere. One needs to invest money into something which would guarantee maximum returns with minimum risks in future. Money saved now will help you overcome tough times in the best possible way.
What are Bonds ?
Bonds are issued by organizations generally for a period of more than one year to raise money by borrowing.
Organizations in order to raise capital issue bond to investors which is nothing but a financial contract, where the organization promises to pay the principal amount and interest (in the form of coupons) to the holder of the bond after a certain date. (Also called maturity date).Some Bonds do not pay interest to the investors, however it is mandatory for the issuers to pay the principal amount to the investors.
What is a Maturity Date ?
Maturity date refers to the final date for the payment of any financial product when the principal along with the interest needs to be paid to the investor by the issuer.
Characteristics of a Bond
- A bond is generally a form of debt which the investors pay to the issuers for a defined time frame. In a laymans language, bond holders offer credit to the company issuing the bond.
- Bonds generally have a fixed maturity date.
- All bonds repay the principal amount after the maturity date; however some bonds do pay the interest along with the principal to the bond holders.
Types of Bonds
Following are the types of bonds:
Fixed Rate Bonds
In Fixed Rate Bonds, the interest remains fixed through out the tenure of the bond. Owing to a constant interest rate, fixed rate bonds are resistant to changes and fluctuations in the market.
Floating Rate Bonds
Floating rate bonds have a fluctuating interest rate (coupons) as per the current market reference rate.
Zero Interest Rate Bonds
Zero Interest Rate Bonds do not pay any regular interest to the investors. In such types of bonds, issuers only pay the principal amount to the bond holders.
Inflation Linked Bonds
Bonds linked to inflation are called inflation linked bonds. The interest rate of Inflation linked bonds is generally lower than fixed rate bonds.
Bonds with no maturity dates are called perpetual bonds. Holders of perpetual bonds enjoy interest throughout.
Bonds which are given less priority as compared to other bonds of the company in cases of a close down are called subordinated bonds. In cases of liquidation, subordinated bonds are given less importance as compared to senior bonds which are paid first.
Bearer Bonds do not carry the name of the bond holder and anyone who possesses the bond certificate can claim the amount. If the bond certificate gets stolen or misplaced by the bond holder, anyone else with the paper can claim the bond amount.
War Bonds are issued by any government to raise funds in cases of war.
Bonds maturing over a period of time in installments are called serial bonds.
Climate Bonds are issued by any government to raise funds when the country concerned faces any adverse changes in climatic conditions.
|Search Management Study Guide