financial ratios

We are going to discuss following financial ratio's ( key valuation ratio's )which are very Important for valuing stocks-
1. Price Earnings Ratio
2. Price–To–Book Ratio
3. Net Current Asset Value
4. Earnings Yield
5. Dividend Yield
6. Return on Invested Capital
7. Return on Equity
8. Margin of Safety


1) PRICE EARNINGS RATIO-

 Price/Earnings (P/E) Ratio =
𝑆ℎ𝑎𝑟𝑒 𝑃𝑟𝑖𝑐e/𝐿𝑎𝑠𝑡 3 𝑦𝑒𝑎𝑟 𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑜𝑓 𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 𝑝𝑒𝑟 𝑆ℎ𝑎𝑟𝑒

P/E is a measure of the amount of $'s an investor would invest, in order to receive $1 of earnings in the company.
A high P/E is ‘perceived’ to indicate investors are expecting are a high earnings growth amount compared to a company with a low P/E.
Note above we refer to historic P/E NOT forward-looking P/E.


2) PRICE-TO-BOOK RATIO-

Price/Book (P/B) Ratio =𝑆ℎ𝑎𝑟𝑒 𝑃𝑟𝑖𝑐𝑒 /𝑁𝑒𝑡 𝐴𝑠𝑠𝑒𝑡 𝑉𝑎𝑙𝑢𝑒 𝑝𝑒𝑟 𝑆ℎ𝑎𝑟𝑒

What is Net Asset Value (NAV)?
1. NAV, also known as the Book Value, Balance Sheet Value or Tangible Asset Value, is a measure the company’s net worth.
2. 𝑁𝐴𝑉=𝑆ℎ𝑎𝑟𝑒 ℎ𝑜𝑙𝑑𝑒𝑟𝑠′ 𝐸𝑞𝑢𝑖𝑡𝑦−𝐼𝑛𝑡𝑎𝑛𝑔𝑖𝑏𝑙𝑒 𝐴𝑠𝑠𝑒𝑡𝑠  
3. 𝑁𝐴𝑉 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒=𝑁𝑒𝑡 𝐴𝑠𝑠𝑒𝑡 𝑉𝑎𝑙𝑢𝑒 /𝐹𝑢𝑙𝑙𝑦 𝑑𝑖𝑙𝑢𝑡𝑒𝑑 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑆ℎ𝑎𝑟𝑒𝑠 𝑂𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔

 The P/B ratio gives a measure of whether you are paying too much for what would be left were the company to go bankrupt immediately.
 A LOW P/B ratio may be a sign the company is undervalued


3) NET CURRENT ASSET VALUE-

𝑁𝑒𝑡 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡 𝑉𝑎𝑙𝑢𝑒=𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠−𝑇𝑜𝑡𝑎𝑙 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠

A RARE but IMPORTANT indicator of an undervalued stock, is a situation whereby a company sells for less than its Net Current Asset Value:

𝑆ℎ𝑎𝑟𝑒 𝑃𝑟𝑖𝑐𝑒 < 𝑁𝑒𝑡 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡 𝑉𝑎𝑙𝑢𝑒 /𝐹𝑢𝑙𝑙𝑦 𝐷𝑖𝑙𝑢𝑡𝑒𝑑 𝑁𝑜. 𝑜𝑓 𝑆ℎ𝑎𝑟𝑒𝑠 𝑂𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔

This would mean the company’s shares are selling BELOW their net liquidation value, and are therefore UNDERVALUED.
Net Current Asset Value is also known as Net Working Capital, but NOT the same as Working Capital (which equals Current Assets minus Current Liabilities)

everything about ratios

4) EARNINGS YIELD-

Earnings Yield =𝐿𝑎𝑠𝑡 3 𝑦𝑒𝑎𝑟 𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑜𝑓 𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 𝑝𝑒𝑟 𝑆ℎ𝑎𝑟𝑒 /share 𝑃𝑟𝑖𝑐𝑒

Note that it is the inverse of the P/E Ratio.
A HIGHER Earnings Yield means you are gaining a higher percentage of earnings for every $ invested in the stock, vs another company with a lower Earnings Yield.
The Earnings Yield is usually compared to the interest rates in government bonds. It should reflect within it the necessary risk premium.


5) DIVIDEND YIELD-

Dividend Yield =𝑇𝑜𝑡𝑎𝑙 𝐴𝑛𝑛𝑢𝑎𝑙 𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒/ 𝑆ℎ𝑎𝑟𝑒 𝑃𝑟𝑖𝑐𝑒

The Dividend Yield is a measure of how much cash flow you receive for each $ you have invested in the company.
Although not used as much when evaluating value proposition, it does form an important metric when evaluating a company’s dividend proposition.
In the absence of any meaningful capital gain, the dividend yield is a useful indicator of your Return on Capital.

6) RETURN ON INVESTED CAPITAL-

𝑅𝑒𝑡𝑢𝑟𝑛 𝑜𝑛 𝐼𝑛𝑣𝑒𝑠𝑡𝑒𝑑 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 = 𝑂𝑤𝑛𝑒𝑟𝑠′ 𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 /𝐼𝑛𝑣𝑒𝑠𝑡𝑒𝑑 𝐶𝑎𝑝𝑖𝑡𝑎𝑙

The Return on Invested Capital (ROIC) gives an indication of how much you as an owner, are truly earning on the capital the company deploys in its business.

So what are Owners’ Earnings and Invested Capital?
What are Owners’ Earnings?
𝑂𝑤𝑛𝑒𝑟𝑠′ 𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠=𝑁𝑒𝑡𝑃𝑟𝑜𝑓𝑖𝑡 + 𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 +𝐴𝑚𝑜𝑟𝑡𝑖𝑠𝑎𝑡𝑖𝑜𝑛 − 𝐶𝑜𝑠𝑡 𝑜𝑓 𝑆𝑡𝑜𝑐𝑘 𝑂𝑝𝑡𝑖𝑜𝑛𝑠 𝑖𝑠𝑠𝑢𝑎𝑛𝑐𝑒 − 𝐶𝐴𝑃𝐸𝑋 𝑠𝑝𝑒𝑛𝑑 −𝑖𝑛𝑐𝑜𝑚𝑒 𝑔𝑒𝑛𝑒𝑟𝑎𝑡𝑒𝑑 𝑓𝑟𝑜𝑚 𝑜𝑣𝑒𝑟 𝑝𝑒𝑟𝑓𝑜𝑟𝑚𝑖𝑛𝑔 𝑝𝑒𝑛𝑠𝑖𝑜𝑛 𝑟𝑎𝑡𝑒𝑠 𝑜𝑓 𝑟𝑒𝑡𝑢𝑟𝑛

The Owner’s Earnings give a more practical figure to the amount of cash flow you would receive if you were the sole owner of the company.
A conservative approach to stock evaluation, made more famous as an approach used by Warren Buffet.

What is Invested Capital?
𝐼𝑛𝑣𝑒𝑠𝑡𝑒𝑑 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 = 𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠 − 𝐶𝑎𝑠ℎ + 𝑝𝑎𝑠𝑡 𝑎𝑐𝑐𝑜𝑢𝑛𝑡𝑖𝑛𝑔 cℎ𝑎𝑟𝑔𝑒𝑠

Invested Capital represents a conservative indicator of the value of capital the company has deployed in its business.

𝑅𝑒𝑡𝑢𝑟𝑛 𝑜𝑛 𝐼𝑛𝑣𝑒𝑠𝑡𝑒𝑑 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 = 𝑂𝑤𝑛𝑒𝑟𝑠′ 𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 /𝐼𝑛𝑣𝑒𝑠𝑡𝑒𝑑 𝐶𝑎𝑝𝑖𝑡𝑎𝑙

Efficient and well run business will deploy less capital in producing each unit of earnings. Therefore a higher ROIC represents a better run business.
Note that some industry’s e.g. Banks tend to have much higher capital needs and therefore lower ROICs.
The ROIC should also be compared to the interest rate on 10 year government bond yields.
The ROIC approach for comparison of various investment opportunities is applicable in other forms of non stock investments e.g. property, etc.


7) RETURN ON EQUITY-
𝑅𝑒𝑡𝑢𝑟𝑛 𝑜𝑛 𝐸𝑞𝑢𝑖𝑡𝑦=𝑁𝑒𝑡 𝑃𝑟𝑜𝑓𝑖𝑡 /𝑆ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟𝑠′ 𝐸𝑞𝑢𝑖𝑡𝑦

Return on Equity (ROE) is a useful guide in comparing the profitability of a company with that of other companies e.g. in the same industry.
It is a less conservative approach than ROIC, but can be modified by using Owners’ Earnings (in place of Net Profit) to evaluate % of owners earnings generated from invested equity.



8) MARGIN OF SAFETY PRINCIPLE-

𝑀𝑎𝑟𝑔𝑖𝑛 𝑜𝑓 𝑆𝑎𝑓𝑒𝑡𝑦 = 𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 𝑌𝑖𝑒𝑙𝑑 − 𝑅𝑖𝑠𝑘 𝑓𝑟𝑒𝑒 𝐺𝑜𝑣𝑒𝑟𝑛𝑚𝑒𝑛𝑡 𝐵𝑜𝑛𝑑𝑠 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑅𝑎𝑡𝑒

The Margin of Safety is the difference between the percentage rate of earnings on the stock at the price you pay for it (i.e. your earnings yield) and the rate of interest on risk free bonds.

financial ratios formula

Benjamin Graham developed the Margin of Safety approach when selecting stock investments, as a quantifiable margin which would absorb ‘unsatisfactory developments’.




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“Investing in the stock markets can provide better, inflation-beating long-term returns if you have the time and know-how to build and manage a well-diversified portfolio. But who does? To the vast majority of UK savers, investing is a murky, complicated world, riddled with hidden costs and uncertainty"
                 -Michelle Pearce, CIO Wealthify


The first key question requires a choice between the extent of control and influence you are willing to take. The two options available in investing in stocks are:
1.Investing in Pooled investment funds
2.Investing and building your Individual stock portfolio

Pooled investment funds are funds available to retail investors that are meant to allow for easier diversification and reduced risk by spreading your investment across multiple shares and other investment securities e.g. bonds.

There are several types of pooled investment funds that are managed by fund managers that you can invest through and purchase from brokers, banks and directly from some fund managers. They include:
1.Unit Trusts
2.Open-Ended Investment Companies (OEICs)
3.Investment Trusts

All funds and fund managers of pooled investment funds should be REGULATED and authorized by local and/or international regulators e.g. the UK’s Financial Conduct Authority (FCA) and US Securities and Exchange Commission (SEC).

Because they are managed, there are COSTS to consider. Although these vary, the main types of costs to consider when evaluating investment funds are:
1.Initial Charges:A large majority of pooled investment funds charge an initial charge for investing in them. In many cases, this could be up to 5% of your investment.
2.Annual Management Charge (Ongoing Charges Figure): You may have to pay an annual management charge.
3.Exit Charge:This may be charged if you want to cash in your investment.

Are the COSTS worth it?

According to a 2017 Morning star data set covering UK Equity Income funds of ‘average risk’:
1.10 Year annualized returns ranged from 4% -8% (vs the UK’s FTSE 100 annualized return of around 5% over the last decade)

2.Initial Charges averaged about 5%, and annual ongoing charges ranged between 1.5% -3%.

Therefore, in many cases retail investors were paying initial charges and annual ongoing charges significantly more than the historic average returns of average risk pooled investment funds.

WHY invest in individual stock portfolios?
1.Inflation hedge, particularly when compared vs saving money in a bank account
2.Provides an avenue to invest in Growth and Income, depending on your risk appetite and investment capital. Favorable in a LOW YIELD world.
3.Allows part-ownership in companies
4.Intellectually stimulating, as requires a disciplined approach over a longer time horizon, and a commitment to carefully studying potential investments

HOW to invest in stocks?
1.Apart from investing via pooled investment funds, you can buy or sell shares directly through authorized stockbrokers.
2.Most brokers offer an online execution-only platform, allowing clients to buy and sell shares independently using apps or online without offering advice.

In addition to market access and online execution services, most online platforms will also provide data or company information resources including historic price charts, financial metrics, latest company news and corporate events.

The main dealing cost categories to consider when buying or selling listed shares, include:
1.Dealing Commission: Either a % of your traded amount or a set amount for more frequent dealing. This may reduce proportionally for more regular and larger capital investing plans e.g. monthly investment.
2.Automatic Reinvestment charges: A reduced dealing fee is offered by most online brokers on dividend amounts reinvested into purchasing stocks. This varies but will usually be around 0.5% of the reinvested amount.
3.Other Fees & Tax: include Stamp Duty Levy, Panel of Takeovers and Mergers (PTM) Levy, broker Admin Fees, Transfer In & Transfer Out fees

What to be AWARE of when investing in shares?
1.Always have a plan as to what you want to achieve by investing stocks i.e. what are your investment goals and investment horizon?
2.Always understand the costs, charges, and fees you have to pay in transacting and maintaining your share account.
3.Reflect carefully on YOUR risk tolerance. This should be related to how much work are you willing to put into research.
4.The Market will NOT always go in your favor, your investment may drop as well as rise.
5.HOPE IS NOT AN INVESTMENT STRATEGY

Invest

Short term trading in currency is unlike short term trading in most other financial markets. A short term trade in stocks or commodities usually means hoarding of position for a day or seven days at least. That's what a short term endows markets. But the cost of Liquidity and Narrow bid of a spread in currencies that we spoke about in early lectures. Prices are constantly fluctuating in small increments in the currency markets.



The steady and fluid price action in currencies allows for extremely short term trading by speculators intent on capturing just a few pips on each trade. Shut down Forex trading at the institutional level typically in walls holding a position for only a few seconds or minutes, and rarely longer than an. But the time element is not the defining feature of short term currency trading. Instead, the pip fluctuations are what is more important. The traders who follow a short term trading style are seeking to profit by repeatedly opening and closing positions after gaining just a few pips. And these could be frequently as little as one or two pips. But that's at the institutional level and not at the retail level for people like you and me. In the interbank market, extremely short term in and out trading is referred to as jobbing the market. The currency also calls it scalping. I'll use the terms interchangeably. Traders who follow this style have to be among the fastest and most disciplined traders because they're out to capture only a few Pips on each trade. In terms of speed, Rapid reaction and Instantaneous decision-making are essential to successfully jobbing the market.

 When it comes to discipline, scalpers must be absolutely ruthless both in taking profits and losses. If you are in it to make only a few pips on each trade you can't afford to lose much more than a few pips on each trade. So jobbing the market requires an intuitive feel for the market. Some traders prefer to as do as Rhythm trading. Scalpers don't worry about the fundamentals too much. If you were to ask a scalper for her opinion of a particular currency pair. She would be likely to respond along the lines of it feels bid or it feels offered. Meaning she senses an underlying buying or selling bias in the market. But only at that particular moment. If you were to ask her again a few minutes later, she may respond in the opposite direction. Successful scalpers, good scalpers have absolutely no allegiance to any single position. They couldn't care less if they couldn't care two hoots for if the currency pair is going up or down. This strictly focused on the next few tips, the position is either looking for them or they are a bit faster than you can blink an eyelid. All they need is essentially volatility and liquidity.

Retail traders, retail investors like you and I have typically are faced with a much wider spread. And that could be as large, as anywhere between two and five pips. Although this makes jobbing slightly more difficult, it doesn't mean that if you're an original investor, you can't engage in short term trading. It just means that you will need to adjust the risk parameters of the style adequately. Instead of looking to make one or two pips on each trade as an institutional trader does. You need to aim for a pip gain at least as large as the spread you're dealing with in each currency pair. You need to basically make more than two to five pips. That's the spread that you're paying. The other basic rule of taking only minimal risk and not hanging onto a position for too long still applies for investors also. I'll share with you some important guidelines to keep in mind when following a shark dome trigging strategy in the effects market. If you're looking to trade the effects market, trade only the most liquid currency pairs just, so Euro/Usd, USD/JPY, that's dollar-yen, Euro Cable, that is EUR/GBP, Euro Yen, and Euro Suisse, CHF.
The most liquid pairs have the tightest trading spreads and fewer sudden price jumps. I'd also suggest that you trade only during times of peak liquidity and market interest. Consistent liquidity and fluid market interest are essential to short term trading strategies. Market liquidity is deepest during the European session when Asian and North American trading centers overlap with European time zones. That's about 2:00 AM to noon Eastern time. Trading and other sessions can leave you with far fewer and less predictable short term price movements to take advantage of. I would suggest that you focus your trading on only one pair at a time. If you're aiming to capture second by second, or minute by minute price movements. You basically need to fully concentrate on that one single pair at the point in time. It also improves your fee for the pair that pair is all that you're watching as you present your default date size so that you don't have to keep specifying it on each deal.


 Look for a brokerage firm that offers fast trading. So that you're not subject to insignificant deals or equals. Adjust your risk and reward expectations to reflect the dealings spent off the cost to pay for your training. With two to five pips spread on the most major pass. You probably need to capture three to ten pips to trade, to offsets loses if the market moves against you. I would suggest I would strongly suggest that you avoid trading during data releases.


 In my experience as a trader Upstox, I have found that getting a short term position into a data release is extremely risky because prices can gap sharply after the release, blowing a short term strategy out of the water. Markets are also prone to quick price adjustments in that 15 to 30-minute window ahead of a major release as nearby orders get triggered. This can lead to a quick shift against your position that may not be resolved before the data comes out. So these are some of the guidelines and suggestions that I have for short term trading strategies

You will know why people fail to follow a trading plan.

>> Developing a disciplined simple trading plan. No matter which trading style you decide to pursue, you need an organized trading plan or you won't get very far. The difference between making money and losing money, especially in the forex market, can be as simple as trading with a plan or trading without one. A trading plan is essentially an organized approach to executing a trading strategy that you have developed, either based on your market analysis or on the outlook that you have. Some of the key components of any trading plan, they're straightforward.

• The first one is to determine the position size. So basically, this is asking the question, how large a position will you take for each trading strategy? Position size is half the equation for determining how much money is at stake in each trade.

• Second, deciding where to enter the position. Exactly where will you try to open the desired position? What happens if your entry-level is not reached?

• Third, setting stock losses and taking profit levels. You need to also set the take profit levels and stop-loss levels. Exactly where will you exit the position, both if it's a winning position which is a take profit level, and if it's a losing position In which your stop loss will get triggered?

 Stop loss and take profit levels are the second half of the equation that determines how much money is at stake in each trade. That's it, just three simple components. But it's amazing how many traders, experienced and beginners alike, open positions without ever having fully talked through exactly what their game plan is.

Of course, you need to consider numerous finer points when constructing a trading plan. But I just want to drive home the point that trading without an organized plan is like flying an airplane blindfolded. You may be able to get off the ground, but it's difficult to land safely. And no matter how good your trading plan is, it won't work if you don't follow it. Sometimes emotions bubble up and distract traders from their trading plan.

Other times, an unexpected piece of news or price movement causes traders to abandon that trade strategy midstream or mid-trade, as the case may be. Either way, when this happens it's the same as never having a trading plan in the first place.
Developing a trading plan and sticking to it, are the two main ingredients of trading discipline. It can't be overemphasized. If you were to name one defining characteristic of successful traders, it won't be a fundamental analysis, or it won't be understanding news and data.

• All analytical skills, though they're all important. No, it would be, it has got to be trading discipline. Traders who follow a disciplined approach are the ones who survive year after year, and the market cycle aftermarket cycle. They can even be wrong more often than right, and still, make money because they follow a disciplined approach. If the key to successful trading is a disciplined approach, developing a trading plan and just sticking to it, then why is it so hard for many traders to practice trading discipline? Well, the answer is a little complex, but it usually boils down to a simple case of human emotions getting the better of them.

• Never underestimate the power of emotions to distract and disrupt your trading strategies. So, exactly how do you take the emotions out of trading? The simple answer is, you can't. As long as your heart is pumping, and your lungs are breathing, emotions are going to be flowing. And truth be told, the emotional highs of trading are one of the reasons why currency traders are drawn to it in the first place. There is no rush quite like putting on a successful trade and taking some money out of the currency markets. So, just accept that you're going to experience some pretty intense emotions when you're trading. That was the shorter answer, that you can't, the longer answer is that, because you can't block out the emotions, the best you can hope to achieve is to understand where the emotions are coming from. 

Recognizing them when they hit you and limiting the impact on your trading. We'll be discussing this in the other course on the behavioral aspects of investing, in a lot more detail. However, it's a lot easier said than done. But keep in mind, that you can do a few things to keep your emotions in check. Firstly, you need to focus on the pips and not the actual money, the dollars, and the cents. So don't be distracted by the exact amount of money that you have made in a trade. Instead, traders focus on where prices are and how they are behaving.

• The market has no idea what your trade size is and how much you're making or losing. But it does nowhere the current price is. So it's not about being right or wrong, it's about making money. The market doesn't care if you're right or wrong and neither should you. The only true way of measuring trading success is in terms of money, in dollars and cents. You're going to lose in quite a number of trades. 

No trader is right all the time, so that's something that you need to basically understand. Taking losses is as much a part of the routine as taking profits. You can still be a very successful trader, over time, with a solid risk management plan and a solid trading plan


So main question arises where to invest, so you can learn all of that from my Blog and If you want to know which Stock I hold, just contact me on deep08dew@gmail.com

 Bonds. If you were to look at a newspaper like
The Financial Times or any financial newspaper, you'll find a lot of
news articles related to stocks. But rarely if ever, do you find mention of bonds. So bonds are widely regarded as the most conservative
investments that you can make.
Generally, they do not
experience a lot of dramatic changes in
prices day-to-day. So they don't make for
very exciting reporting and that's one of
the reasons why you don't find bonds being reported
in the newspapers all day.



 But that being said, bond markets are actually
larger than stock markets. In recent years, a majority of corporate financing
which can either happen through debt
or through equity, a lot of corporate financing has been accomplished
through bonds.
Moreover, though this
is not very well-known, but as many individuals own
bonds as they own stocks. Bonds are issued by various
entities like corporations, state governments, local
governments, their agencies, for instance in the US,
the federal government, the United States
government issues bonds, its agencies, the federal
agencies issue bonds and so on. Now professional
bond traders typically use one-word designations for
the bond of each issue. Which are for instance, if it's a corporate bond, okay they'll just say corporates. If it's a municipal bond, bond traders would
call that municipals. If it's a government bond,
they say government's. If it's a federal agency
that's issued the bond, we call it agencies and so on. So while each of these bonds have unique characteristics
for instance corporate bonds
are different from municipal bonds from
government bonds, but all of them have
one basic function, which is that they are
all formal I owe you, in which the issuer
typically promises to repay the total amount borrowed
at a predetermined date. So in addition,
the issuer also mentions that what does
the compensation that the bondholder will receive
for renting out his capital. This compensation is
typically paid on a semi-annual basis and
more often than not, these are fixed
interest rates that are paid during the years in
which the bond is owned. So in the language of bonds, the total amount to be repaid
is called variously in different forms as
either the principle amount or the face value
or the par value. The repayment date is typically known as
the maturity date. The interest rate of
the bond is called a coupon, okay and we'll come to very shortly we'll talk about
why it's called a coupon, and the period of time in which the bond is outstanding
is called as the term. All this information is
printed on the face of a bond. So if you look at
a bond certificate, you'll find all that information
in the bond certificate. Now in the past, bond certificates would
come with coupons attached. So you'll have a certificate
with perforations of coupons and which your coupons
are typically periodically clipped from the bond certificate and presented for payment, and that's how interest payments came to be known as coupons, which have now become synonymous with
fixed interest payments. There are two ways in
which bonds can be owned. They can be owned in
a registered format, in which case the corporation
which has issued the bond actually has in its registry the name of the owner of the bond
or it could be in bearer form in which case whoever has the bond
with him or her, is essentially
considered the owner. Most corporate bonds are
registered bonds while municipals and government bonds are issued as bearer bonds. A bond certificate then is essentially a certificate
of indebtedness, spelling out the terms of the issuer's terms
to repay the money. Sometimes this promise
of repaying is reinforced by collateral such
as equipment or property. But usually bonds offer
only what is called as the full faith and
credit of the borrower. Sometimes bonds are also
called as debentures.
These are essentially
un-collateralized IOUs in which case the issuer
is not putting any collateral of plant or
machinery or equipment. In terms of the risk, the obligations issued
by the government are regarded as the safest
investment that is possible.
 After all, as the saying goes, only the government has
the ability to print money.