Bonds are debt instruments issued by governments and large organizations to raise capital. When an investor purchases a bond, they are lending money to the bond issuer. In exchange, the bond issuer promises to repay the principal amount at maturity and make regular interest payments until then. Bond values can fluctuate depending on factors like the issuer's creditworthiness, prevailing market interest rates, and the bond's maturity date and yield.
1. BOND
Definition
A debt instrument issued for a period of more than one year with the
purpose of raising capital by borrowing. The Federal government, states,
cities, corporations, and many other types of institutions sell bonds.
Generally, a bond is a promise to repay the principal along with
interest (coupons) on a specified date (maturity). Some bonds do not
pay interest, but all bonds require a repayment of principal. When an
investor buys a bond, he/she becomes a creditor of the issuer. However,
the buyer does not gain any kind of ownership rights to the issuer, unlike
in the case of equities. On the hand, a bond holder has a greater claim on
an issuer's income than a shareholder in the case of financial distress
(this is true for all creditors). Bonds are often divided into different
categories based on tax status, credit quality, issuer type, maturity and
secured/unsecured (and there are several other ways to classify bonds as
well). U.S. Treasury bonds are generally considered the safest unsecured
bonds, since the possibility of the Treasury defaulting on payments is
almost zero. The yield from a bond is made up of three components:
coupon interest, capital gains and interest on interest (if a bond pays no
coupon interest, the only yield will be capital gains). A bond might be
sold at above or below par (the amount paid out at maturity), but the
market price will approach par value as the bond approaches maturity. A
riskier bond has to provide a higher payout to compensate for that
additional risk. Some bonds are tax-exempt, and these are typically
issued by municipal, county or state governments, whose interest
payments are not subject to federal income tax, and sometimes also
state.
2. BOND VALUE
Definition
The value that a convertible bond would have if it was no longer convertible. The
bond value represents the market value of the bond less the value of the conversion
option.
BOND VALUATION
Definition
The act of evaluating certain aspects of a bond such as the interest rate,
possible yield, and maturity date to determine the fair value of the
security.
What Does Bond Valuation Mean?
A technique for determining the fair value of a
particular bond. Bond valuation includes calculating the
present value of the bond's future interest payments, also
known as its cash flow, and the bond's value upon maturity,
also known as its face value or par value. Because a bond's
par value and interest payments are fixed, an investor uses
bond valuation to determine what rate of return is required
for an investment in a particular bond to be worthwhile.
Investopedia explains Bond Valuation
Bond valuation is only one of the factors investors
consider in determining whether to invest in a particular
3. bond. Other important considerations are: the issuing
company's creditworthiness, which determines whether a
bond is investment-grade or junk; the bond's price
appreciation potential, as determined by the issuing
company's growth prospects; and prevailing market interest
rates and whether they are projected to go up or down in the
future.
Question: What Are Bonds?
Answer: Bonds are another word for loans taken out by large organizations, such as
corporations, cities, and the U.S. Government. Since these entities are so large, they need
to borrow the money from more than one person or bank.
Therefore, bonds are a piece of a really big loan. The borrowing organization promises to
pay the bond back, and pays interest during the term of the bond. Since large
organizations don't like to actually say they are borrowing money, they say they are
selling bonds...presumably because it sounds better.
Like loans, bonds return interest payments to the bond holder. In the old days, when
people actually held paper bonds, they would redeem the interest payments by clipping
coupons. Today, most bonds are held by the financial planning institution, and interest is
automatically accrued for the life of the bond.
Bonds are usually resold before they mature, or reach the end of the loan period. This is
how bonds rise and fall in value. Since bonds return a fixed interest payment, they tend to
look more attractive when the economy and stocks market decline. When the stock
market is doing well, investors are less interested in purchasing bonds, and their value
drops.
Like stocks, bonds can be packaged into a bond mutual fund. This is a good way for an
individual investor to let an experienced mutual fund manager pick the best selection of
4. corporate bonds. A bond fund can also reduce risk through diversification. This way, if
one corporation defaults on its bonds, then only a small part of the investment is lost.