Bonds are financial instruments that represent a form of debt issued by governments, municipalities, and corporations.
When an entity needs to raise capital, it can issue bonds to investors, who essentially lend money to the issuer. In return, the issuer promises to pay periodic interest payments to the bondholders and return the principal amount at the bond's maturity.
Bonds are considered relatively safer investments compared to stocks because they provide a fixed income stream and have a higher priority in receiving repayment in case of bankruptcy or liquidation.
The value of bonds can be influenced by various factors, and they play a crucial role in investment strategies aimed at preserving capital and generating income.
Bonds have a face value, also known as the par value or principal amount, which represents the amount the issuer borrows and promises to repay at maturity.
Bonds have a coupon rate, which is the fixed or floating interest rate that the issuer agrees to pay to bondholders. The coupon rate is usually expressed as a percentage of the bond's face value, and it determines the periodic interest payments made to bondholders.
Bonds have a specified maturity date, which is the date when the issuer agrees to repay the bond's face value in full. Maturities can range from a few months to several years or even decades, depending on the bond's term.
Bonds typically pay periodic interest payments, known as coupon payments, to bondholders. These payments are made at fixed intervals, such as annually, semi-annually, quarterly, or monthly, depending on the terms of the bond. The coupon payment amount is calculated based on the bond's face value and coupon rate.
The yield of a bond represents the effective return an investor can expect to earn from holding the bond until maturity. Yield takes into account the bond's current price, coupon payments, and time to maturity.
Bonds are assigned credit ratings by independent rating agencies, such as Standard & Poor's, Moody's, or Fitch. These ratings assess the creditworthiness of the bond issuer and indicate the risk of default. Higher-rated bonds are considered safer investments, while lower-rated bonds carry higher credit risk.
Bond prices can fluctuate in response to changes in interest rates, credit ratings, and market conditions. When interest rates rise, bond prices tend to fall, and vice versa.
