Bonds

Bonds are fixed income instruments that are issued by entities to raise funds. Bonds are loan or debt instruments. There are two types of issuers of bonds, businesses and governments. Owners of bonds are called by different names bondholder, issuer, debtholder and creditor.

• Corporate bonds – Businesses
• Municipal bonds – Government

The government offers bonds to ​fund expenses. Companies may issue bonds to cover cost that maybe a bank cannot provide. Bonds allow  individuals to become the lender. 

How Bonds work

When companies or government entities need to raise money to finance new projects, maintain ongoing operations, or refinance existing debts, they may issue bonds directly to investors. The borrower issues a bond that includes the terms of the loan, interest payments that will be made, and the time at which the loaned funds, which is the principal, must be paid back, which is the maturity date. The interest payment which is called the coupon is part of the return that bondholders earn for loaning their funds to the issuer. The interest rate that determines the payment is called the coupon rate.

Aspects of Bonds

• Face value – the amount of money the bond will be worth at maturity date.
• Maturity date – the date the bond matures 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 bonds.
• Coupon rate – the rate of interest 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.