Bond definition
/What is a Bond?
A bond is a fixed obligation to pay that is issued by a corporation or government entity to investors. Bonds are used to raise cash for operational or infrastructure projects. Bonds usually include a periodic coupon payment, and are paid off as of a specific maturity date. There are a number of additional features that a bond may have, such as being convertible into the stock of the issuer, or callable prior to its maturity date.
When a bond is issued, the issuing entity is the borrower, while the investor who buys it is acting in the role of a lender.
Characteristics of a Bond
Here are the key characteristics of a bond:
Face value. This is the nominal value of a bond, typically $1,000, which is paid back to the bondholder at maturity. It is the basis for any interest payments made by the issuer.
Coupon rate. This is the interest rate that the issuer agrees to pay annually or semi-annually on the face value. It is expressed as a percentage.
Callability. Some bonds have a call feature, which means that the issuer can repay investors before the maturity date, often to refinance at lower interest rates.
Maturity date. This is the date when the bond’s principal (face value) is repaid to the bondholder.
Issuer. This is the entity that issues the bond, such as a corporation, municipality, or government.
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Bond FAQs
How does bond pricing work?
Bond pricing is determined by comparing the bond’s fixed interest payments (coupon) to current market interest rates. When market rates rise, existing bonds with lower coupons become less attractive, causing their prices to fall; when rates fall, bond prices rise. Other factors such as credit risk, time to maturity, and inflation expectations also influence a bond’s market value.
What is the difference between a registered bond and a coupon bond?
A registered bond records the owner’s name with the issuer, so interest and principal are paid directly to that owner. A coupon bond is payable to whoever holds the physical bond and clips attached coupons to collect interest. Registered bonds provide ownership tracking, while coupon bonds allow easier transfer and more anonymity.