Bond is a debt instrument, where the issuer acknowledges debt owed to the holder and is responsible to repay the principal as well as the interest upon the maturity. Bonds are generally issued by the corporations and differ from the equity shares and stocks. Unlike, equity shares, bonds do not confer any ownership rights to the holder. Apart from corporations, bonds may be issued by several statutory bodies and even by the governments.
Bonds can be classified into four types a) Bonds issued by Federal Governments, such bonds are called ‘treasuries’ (b) Bonds issued by Government agencies. (C) Corporate Bonds (d) Bonds issued by state or local governments. Bonds are also known as fixed income securities, since they generate a pre-fixed income for their tenure. Interest payable on a bond is called ‘Coupon Rate’. Coupon rate is denoted as a percentage of par value. Tenure of bond is known as its ‘Maturity period’.
Bonds’ maturity period may range from a couple of months to several years. Another important factor to consider is ‘Par value’ which is the amount payable to holder on maturity of bond. Despite being called ‘Fixed Income security', bonds still carry the risk of default. To counter this problem, bonds generally come with credit rating. Higher rating denotes lower risk of default.
Bonds are an extremely popular investment opportunity, with the bond market alone worth several billion dollars. Many investors dabble in the process of arbitrage where they can purchase the bonds at a discount and then collect the face value at maturity. This is actually a completely risk free way of making money from investing in bonds.
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