Bond
In finance, a bond is a debt investment in which an investor loans money to an entity (typically a corporation or government) for a defined period at a fixed interest rate. Bonds are essentially IOUs issued by the borrower, known as the issuer, to the bondholder, who is the investor purchasing the bond.
Key features of bonds include:
Principal/Par Value: This is the initial amount of money borrowed by the issuer, also known as the face value or par value of the bond. It is the amount that the issuer promises to repay to the bondholder at the bond's maturity date.
Coupon Rate: The coupon rate is the fixed annual interest rate paid by the issuer to the bondholder, typically expressed as a percentage of the bond's par value. The coupon payments are made periodically (e.g., semi-annually or annually) throughout the life of the bond.
Maturity Date: This is the date on which the issuer repays the principal amount to the bondholder, also known as the redemption date. Bonds can have varying maturity dates, ranging from short-term (e.g., one year or less) to long-term (e.g., 30 years or more).
Yield: The yield of a bond is the annual rate of return earned by the bondholder, taking into account both the coupon payments and any changes in the bond's price. Yield is expressed as a percentage of the bond's current market price.
Credit Rating: Bonds are assigned credit ratings by credit rating agencies based on the issuer's creditworthiness and the likelihood of default. Higher-rated bonds are considered safer investments and typically offer lower yields, while lower-rated bonds (also known as junk bonds) offer higher yields but carry a higher risk of default.
Market Price: The market price of a bond is the current trading price at which the bond is bought and sold in the secondary market. Bond prices can fluctuate based on changes in interest rates, credit risk, and other market factors.
Bonds are commonly used by corporations and governments to raise capital for various purposes, such as financing capital projects, expanding operations, or refinancing existing debt. They are considered relatively safe investments compared to stocks because they offer fixed income streams and are typically less volatile. However, bonds still carry risks, including interest rate risk, inflation risk, and credit risk, which investors should consider before investing in bonds.
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