Terms Associated With Bonds

What is a Bond ?

A bond is one of the fixed income investment products that represents a loan given to a borrower by the investors. The investors get interest income in return for the money they lent. It includes details of the loan like the date when the principal payment is due, the interest and the terms of interest payments.

Companies sell bonds to finance ongoing operations, new projects or acquisitions. Governments sell bonds for funding purposes, and also to supplement revenue from taxes.

It is a liability for the issuer (usually a government or company), and an asset for the bondholder (usually an entity or individual investor).

TERMINOLOGY OF BONDS –

There are some important key terms that are associated with all types of bonds. These are –

  1. MATURITY : The bond issuing company agrees to pay back the principal amount of the bond to the bondholder on a pre-defined date. This is called the bond maturity date. Once the principal amount is returned, the bondholder stops receiving the interest payments as well.
  2. PAR VALUE : Par value is the amount of money that will be returned to the bondholder at the maturity date. It is also known as face value of the bond.
  3. YIELD : It refers to the rate of return on the bond. While coupon is fixed, yield is variable and depends on a bond’s price in the secondary market and other factors. It can be expressed as current yield, yield to maturity and yield to call.
  4. MARKET VALUE : The market value of a bond is the value at which the bond is currently being bought and sold in the market which can either be at premium or discount to the face value.
  5. COUPON : A coupon payment is the amount of annual interest that will be paid to the bondholder on an annual basis. The coupon payment per bond unit is :

          Coupon Payment = Face Value of Bond X Coupon Rate of the Bond in %

This amount can be paid either monthly, quarterly, annually or semi annually until maturity.

  1. BOND DURATION : Duration measures the sensitivity of a bond‘s price to the interest rate changes. It is not an indicator of the length of time until maturity.
  2. CURRENT YIELD : Current yield is the coupon (interest) divided by the current market price of the bond, which maybe more or less than the par value.

 

Thus, in simple words bonds are investment securities where an investor lends money to a company or a government for a set period of time, in exchange for regular interest payments.

Accounting & Finance for Banking

Principles & Practices of Banking Module E Pdf

Free
Module E PPB ePDFs available in our android app. Get them all at https://iibf.info/app

Accounting and Finance for Banking Module A Pdf

Free
Accounting and finance for bankers all ePDFs are available in our an app. Get them all at https://iibf.info/app

Accounting and Finance for Banking Module A Pdf

Free
Accounting and finance for bankers all ePDFs are available in our an app. Get them all at https://iibf.info/app

Leave a reply

Please enter your comment!
Please enter your name here

Popular

Free Live Classes

More from author

Money Market Instruments

Money market instruments are short-term financing instruments aiming to increase the financial liquidity of businesses.  These are the securities that provide businesses, banks, and...

Forfaiting in detail

Forfaiting is a mechanism where the exporter surrenders his rights to receive payment against the goods and services rendered to the importer in exchange...

Factoring in detail

Factoring is defined as a financing technique which involves a financial agreement between 2 parties, namely, factor & a client in which  the firm...

ADR – American Depository Receipts

American Depository Receipt (ADR) is a certified negotiable instrument issued by an American bank suggesting the number of shares of a foreign company that...