Introduction to Bonds Finance Academy

Bonds

Bonds Bonds are certificates of indebtedness issued by a corporation, government agency, nonprofit, or other entity that wishes to raise capital. They usually have a face value of $1,000. Face Value – amount printed on the front of the bond.

Bonds Considered safer than common stocks. If business fails, bondholders paid in full before stockholders are paid. For this reason, bonds are known as senior securities.

Bonds Pay interest like other loans, periodically or lump sum at maturity.

Bonds Coupon Bonds – interest paid on regular basis. Traditionally had coupons attached. Coupon Rate – rate of interest shown on face of the bond.

Bonds Zero-Coupon Bonds – pay no interest until maturity. Maturity Date – date by which a bond must be repaid to the investor.

Bonds Bonds pay a fixed rate of interest, so they are referred to as fixed income securities.

Bonds Mortgage Bonds – when property, such as a factory or machine is pledged as security for a bond (collateral) Debenture Bonds – a general obligation of the corporation (not backed by property or collateral)

Bonds Notes – short term bonds

Bonds Callable Bonds – can be “called back” or redeemed by the issuer after certain period of time before maturity date.

Bonds – Always Safe? No! High-yield or “junk” bonds – issued by corporations without credit rating needed for low rate of interest. Higher risk = Higher Interest

Bonds – How are they sold? Public offering – used to first sell bonds to the public. Private placement – informal sale of bonds to a private investor or investors

Bonds – What are “yields?” Current Yield– rate of interest that will be earned at the current market price of the bond. Is higher or lower than bond’s face value if purchased in secondary market.

Bonds – Yields, continued Inverse relationship between current interest rates and bond prices– read notes silently for understanding. Stated (or nominal) yield – interest rate stated on face of bond.