Bond (finance)

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Bond (finance)

A bond is a fixed-income financial instrument that represents a loan made by an investor to a borrower (typically corporate or governmental). A bond could be thought of as an I.O.U. between the lender and borrower that includes the details of the loan and its payments. Bonds are used by companies, municipalities, states, and sovereign governments to finance projects and operations. Owners of bonds are debtholders, or creditors, of the issuer.

Characteristics of Bonds

Bonds have several key characteristics, including:

• Face Value: The amount of money a bond will be worth at its maturity, and the amount the bond issuer agrees to pay back.
• Coupon Rate: The interest rate the bond issuer will pay on the face value of the bond, expressed as a percentage.
• Coupon Dates: The dates on which the bond issuer will make interest payments.
• Maturity Date: The date on which the bond will mature and the bond issuer will pay the bondholder the face value of the bond.
• Issue Price: The price at which the bond issuer originally sells the bond.

Types of Bonds

There are several types of bonds, including:

• Government bonds
• Corporate bonds
• Municipal bonds
• Zero-coupon bonds
• Convertible bonds

Bond Markets

Bonds are traded on the bond market. The bond market is divided into two segments: the primary market and the secondary market. In the primary market, bonds are sold directly by issuers to investors. In the secondary market, investors trade bonds among themselves.

Bond Pricing

The price of a bond is determined by the present value of its future interest payments, also known as its cash flow, discounted at the bond's yield to maturity. The yield to maturity is the rate of return anticipated on a bond if it is held until the maturity date.

Risks Associated with Bonds

Bonds are subject to various risks, including:

• Interest rate risk
• Credit risk
• Inflation risk
• Liquidity risk

Related Pages

• Government bond
• Corporate bond
• Municipal bond
• Zero-coupon bond
• Convertible bond
• Bond market
• Interest rate risk
• Credit risk
• Inflation risk
• Liquidity risk