The goal in this chapter is to introduce you to bonds. After studying this chapter you will be able to understand: Important bond features and types of bonds, cond values and yields and why they fluctuate, bond ratings and what they mean, the impact of inflation on interest rates, the term structure of interest rates and the determinants of bond yields. | Types of Debt 1 Bond Basics 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. a bond is nothing more than a loan of which you are the lender. The organization that sells a bond is known as the issuer. Bond Basics 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 often 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. Bonds are known as fixed-income securities because you know the exact amount of cash you'll get back, provided you hold the security until maturity. The primary advantage of | Types of Debt 1 Bond Basics 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. a bond is nothing more than a loan of which you are the lender. The organization that sells a bond is known as the issuer. Bond Basics 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 often 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. Bonds are known as fixed-income securities because you know the exact amount of cash you'll get back, provided you hold the security until maturity. The primary advantage of being a creditor is a higher claim on assets than that of shareholders. In the case of bankruptcy a bondholder will get paid before a shareholder does. Bond Basics-Characteristics Face Value/Par Value Face value or par value is the amount of money a holder will receive 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's price trades 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 or Interest Rate The coupon is the amount the bondholder will receive as interest payments. Most bonds pay interest every 6 months Bond Basics-Characteristics Maturity The maturity date is the future day on which the investor's principal will be repaid. Maturities can range from as little as one day to as long as 30 years (though terms of 100 years have been issued!).
