Bonds
A Bond is a debt security that represents a loan made by an investor to a borrower, typically a corporation or government. The borrower is obligated to pay back the loan, with interest, on a fixed schedule. Bonds are often issued to raise capital for long-term projects or to fund ongoing operations.
When an investor buys a bond, they are essentially lending money to the borrower. The borrower, in turn, promises to pay the investor a fixed rate of interest, known as the coupon rate, over the life of the bond and return the principal amount when the bond matures. The bond maturity date is the date on which the borrower must repay the bond's face value to the bondholder.
Bonds can be classified into several categories based on the creditworthiness of the issuer and the length of time until maturity. Investment-grade bonds are issued by companies or governments with strong credit ratings, while junk bonds are issued by companies or governments with weaker credit ratings. Treasury bonds are issued by the U.S. government, municipal bonds are issued by state and local governments, and corporate bonds are issued by companies.
Bonds are considered a lower-risk investment than stocks but also have lower returns. They are often used as a way to diversify a portfolio and as a source of regular income.
Long-term fixed-interest securities (debt securities) issued by the federal or central government, local governments (such as municipalities), or companies with fixed tenure (lifespan). It is a contract to repay the money borrowed. A bond is a fixed-income security that allows the lender to lend a predetermined value of funds and be eligible for interest on those funds.
However, there are various types besides long-term bonds: short-term, redeemable, irredeemable, fixed or variable interest bonds, and secured or unsecured bonds. It is issued to raise additional funds from the public after raising funds from the market with a fixed income promised at regular intervals, irrespective of interest rate fluctuations.
Different Types of Bonds:
There are several types of bonds, including:
Government Bonds:
These are issued by national governments and are considered to be among the safest investments. Examples include US Treasury Bonds and UK Gilts.
Corporate Bonds:
These are issued by companies to raise funds for business expansion or other purposes. They are considered to be riskier than government bonds but can offer higher returns.
Municipal Bonds:
These are issued by state and local governments to raise funds for infrastructure projects or other public works. They are generally considered to be safer than corporate bonds but riskier than government bonds.
Treasury Inflation-Protected Securities (TIPS):
These are bonds issued by the US government that are designed to protect investors from inflation. The principal and interest payments on these bonds are adjusted for inflation.
Floating Rate Bonds:
These are bonds that have a variable interest rate that is based on a benchmark rate, such as the London Interbank Offered Rate (LIBOR).
High-yield Bonds:
These are bonds issued by companies with a lower credit rating and are considered to be higher risk, but they also offer higher returns than investment-grade bonds.
Zero-Coupon Bonds:
These are bonds that do not make periodic interest payments; instead, the bond is sold at a discount to its face value, and the investor receives the face value on maturity.
