Dr. Hem Shweta Rathore

A company needs funds to expand into new markets, while governments
need money for everything from infrastructure to social programs.

The problem large organizations run into is that they typically need far more
money than the average bank can provide.
The solution is to raise money by issuing bonds (or other debt instruments)
to a public market.
Thousands of investors then each lend a portion of the capital needed.
Therefore, a bond is nothing more than a loan for which investors are the
lender.
The organization that sells a bond is known as the issuer.
The issuer of a bond must pay the investor something extra for the privilege
of using his or her money.
This "extra" comes in the form of interest payments, which are made at a
predetermined rate and schedule.
The interest rate is referred to as the coupon.
The date on which the issuer has to repay the amount borrowed (known as
face value) is called the maturity date.
Dr. Hem Shweta Rathore
Bonds are known as fixed-income securities because investors knows the
exact amount of cash they'll get back if they hold the security until maturity.
By purchasing debt (bonds) an investor becomes a creditor to the
corporation (or government).
The primary advantage of being a creditor is that investors have a higher
claim on assets than shareholders do: that is, in the case of bankruptcy, a
bondholder will get paid before a shareholder.
The bondholder does not share in the profits if a company does well - he or
she is entitled only to the principal plus interest.
There is generally less risk in owning bonds than in owning stocks, but this
comes at the cost of a lower return.
Bonds have a number of characteristics, all of these play a role in
determining the value of a bond and the extent to which it fits in investors
portfolio.
FACE VALUE/PAR VALUE
The face value (also known as the par value or principal) is the amount of
money a holder will get back once a bond matures.

A newly issued bond usually sells at the par value.
Corporate bonds normally have a par value of $1,000, but this amount can
be much greater for government bonds.
When a bond trades at a price above the face value, it is said to be selling
at a premium.
When a bond sells below face value, it is said to be selling at a discount.
COUPON (THE INTEREST RATE)

The coupon is the amount the bondholder will receive as interest payments.
The coupon is expressed as a percentage of the par value. If a bond pays a
coupon of 10% and its par value is $1,000, then it'll pay $100 of interest a
year.
most bonds pay interest every six months, but it's possible for them to pay
monthly, quarterly or annually.
. A rate that stays as a fixed percentage of the par value like this is a fixedrate bond.
Another possibility is an adjustable interest payment, known as a floatingrate bond. In this case the interest rate is tied to market rates through an
index, such as the rate on Treasury bills.
MATURITY
The maturity date is the date in the future on which the investor's principal
will be repaid.
Maturities can range from as little as one day to as long as 30 years.
A bond that matures in one year is much more predictable and thus less
risky than a bond that matures in 20 years.
Therefore, the longer the time to maturity, the higher the interest rate.
Also, all things being equal, a longer term bond will fluctuate more than a
shorter term bond.
ISSUER
The issuer of a bond is a crucial factor to consider, as the issuer's stability is
investors main assurance of getting paid back.

For example, the U.S. government is far more secure than any corporation.
Its default risk (the chance of the debt not being paid back) is extremely
small - so small that U.S. government securities are known as risk-free
assets.
A company, on the other hand, must continue to make profits, which is far
from guaranteed.
This added risk means corporate bonds must offer a higher yield in order to
entice investors - this is the risk/return trade-off in action.
Column 1: Issuer - This is the company, state (or province) or country that is
issuing the bond.

Column 2: Coupon - The coupon refers to the fixed interest rate that the
issuer pays to the lender.
Column 3: Maturity Date - This is the date on which the borrower will repay
the investors their principal. Typically, only the last two digits of the year are
quoted: 25 means 2025, 04 is 2004, etc.
Column 4: Bid Price - This is the price someone is willing to pay for the
bond. It is quoted in relation to 100, no matter what the par value is. Think of
the bid price as a percentage: a bond with a bid of 93 is trading at 93% of its
par value.
Column 5: Yield - The yield indicates annual return until the bond matures.
Usually, this is the yield to maturity, not current yield. If the bond is callable it
will have a "c--" where the "--" is the year the bond can be called. For
example, c10 means the bond can be called as early as 2010.
BOND YIELD
Yield is a figure that shows the return, an investor get on a bond.
The simplest version of yield is calculated using the following formula: yield
= coupon amount/price.
When an investor buy a bond at par, yield is equal to the interest rate.
When the price changes, so does the yield.
YIELD TO MATURITY
YTM is a more advanced yield calculation that shows the total return
an investor will receive if he hold the bond to maturity.
It equals all the interest payments an investor will receive (and
assumes that he will reinvest the interest payment at the same rate as
the current yield on the bond) plus any gain (if he purchased at a
discount) or loss (if he purchased at a premium).

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A company needs funds to expand into new markets, while governments

need money for everything from infrastructure to social programs.

Bonds are known as fixed-income securities because investors knows the