A bond is a debt security, similar to an IOU. Borrowers issue bonds to raise money from investors willing to lend them money for a certain amount of time. When investor buy a bond, they are lending to the issuer, which may be a government, municipality, or corporation. In return, the issuer promises to pay investor a specified rate of interest during the life of the bond and to repay the principal, also known as face value or par value of the bond, when it “matures,” or comes due after a set period of time
Below mentioned are Types of Bond and its description:
Bonds and stocks are both securities, but the major difference between the two is that (capital) stockholders have an equity stake in a company (i.e. they are owners), whereas bondholders have a creditor stake in a company (i.e. they are lenders). As creditors, bondholders have priority over stockholders. This means they will be repaid in advance of stockholders, but will rank behind secured creditors, in the event of bankruptcy.
Another difference is that bonds usually have a defined term, or maturity, after which the bond is redeemed, whereas stocks typically remain outstanding indefinitely. An exception is an irredeemable bond, which is a perpetuity, that is, a bond with no maturity. Certificates of deposit (CDs) or short-term commercial paper are classified as money market instruments and not bonds: the main difference is the length of the term of the instrument.
Most bonds are issued at or near par value, usually Rs.10,000. The issuer receives this money when the bonds are first offered and, in return, promises to pay investors a stated fixed interest rate (the “coupon rate”) at regular intervals with the intent of returning that initial investment of Rs. 10,000 back to bondholders at maturity.
After a bond is issued, it can be traded in the secondary market, causing the bond’s price to fluctuate depending on supply and demand, changes in interest rates, and any news about the financial health of the issuer that could impact its ability to honor the obligations of the bond.
Bonds are units of corporate debt issued by companies and securitized as tradeable assets. A bond is referred to as a fixed-income instrument since bonds traditionally paid a fixed interest rate (coupon) to debtholders. Variable or floating interest rates are also now quite common. Bond prices are inversely correlated with interest rates: when rates go up, bond prices fall and vice-versa. Bonds have maturity dates at which point the principal amount must be paid back in full or risk default.
Most bonds and interest rates have an inverse relationship. When rates go up, bond prices typically go down, and when interest rates decline, bond prices typically rise. This is a fundamental principle of bond investing, which leaves investors exposed to interest rate risk—the risk that an investment’s value will fluctuate due to changes in interest rates. Current bond yields are calculated by dividing the annual interest payment by the bond’s current price (current yield = annual coupon ÷ bond price). So, when the bond price drops, its yield increases, making it competitive against newer bonds paying higher rates. In short, bond prices and bond yields move in opposite directions.
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