What is Bonds?

 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.