Bonds

A bond is a debt security, which represents a share of a long-term debt issued by a government, a local government or a company.There are many types of bonds, but all have a common feature: the payment of an interest (called a coupon ) in exchange for the loan made by the holder.

When you purchase a bond issued by a corporation or a government, you are actually loaning the issuer money. The bond specifies the amount of the loan, the interest rate, how often the issuer will make interest payments to you and the date the principal of the loan must be paid in full (the maturity date).

For example, you might purchase a €10,000 bond with the following characteristics:

  • 8% annual interest rate.

  • Interest paid in one annual payment.

  • Bond matures in 2021, when you would get back your original €10,000 principal.

A bond is notably characterized by:

Its face value: (also called its par value or nominal value): This represents the amount of money the issuer receives for each bond and is used to fix the amount that he will repay upon redemption. This amount is also the basis for calculating interest payments.

Its coupon rate: (also called its nominal rate): This is the interest on a bond and represents the compensation paid by the issuer for the time value of money. Interest is generally expressed as a percentage: a fixed rate, a floating rate or payable at maturity. The dated date is when interest starts accruing on a new issue, which frequently coincides with the issue date.

Its maturity: This is the redemption date of the debt instrument. Redemption takes place when the debt instrument is fully amortized. A premium exists when the debt instrument is reimbursed for an amount higher than its face value.

Its redemption/reimbursement provisions: These refer to the conditions in which the debt instruments may be repaid, for instance in tranches, equal installments or in one single payment at maturity.

Many investors choose bonds when they want a source of current income while seeking to preserve their capital. Bonds often are referred to as "fixed income" investments because they typically offer fixed interest payments and principal repayment. A bond must be repaid by its issuer, as well as make interest payments to the holder.

When you buy a government bond at its issuing date, and hold until the bond’s maturity date, the risk of loss for your investment is nearly zero. The only risk would be if an issuer defaults on payment. While possible, default by major world governments is highly improbable.

However, the risk of default is much higher with some corporate bonds.  In this case, the issuing company may be unable to repay its debts due to bankruptcy or other events.   To help the financial community evaluate this risk, corporate bonds are rated by an independent rating service, such as Standard & Poor's, Moody's Investment Services, Inc.  or Fitch. These companies use letter grades ranging from triple A (the highest) to D (in default) to evaluate a bond's credit quality.

Another consideration is the risk of relative loss if you sell a bond before its maturity date. Depending on market conditions, the current price of the bond may be lower than the price at its issue date.  You would also lose interest that would have accrued between your selling date and the bond’s maturity date.

A bond is a debt security, which represents a share of a long-term debt issued by a government, a local government or a company.There are many types of bonds, but all have a common feature: the payment of an interest (called a coupon ) in exchange for the loan made by the holder.

When you purchase a bond issued by a corporation or a government, you are actually loaning the issuer money. The bond specifies the amount of the loan, the interest rate, how often the issuer will make interest payments to you and the date the principal of the loan must be paid in full (the maturity date).

For example, you might purchase a €10,000 bond with the following characteristics:

  • 8% annual interest rate.
  • Interest paid in one annual payment.
  • Bond matures in 2021, when you would get back your original €10,000 principal.

A bond is characterized by:

Its face value (also called its par value or nominal value): This represents the amount of money the issuer receives for each bond and is used to fix the amount that he will repay upon redemption. This amount is also the basis for calculating interest payments.

Its coupon rate(also called its nominal rate): This is the interest on a bond and represents the compensation paid by the issuer for the time value of money. Interest is generally expressed as a percentage: a fixed rate, a floating rate or payable at maturity. The dated date is when interest starts accruing on a new issue, which frequently coincides with the issue date.

Its maturity: This is the redemption date of the debt instrument. Redemption takes place when the debt instrument is fully amortized. A premium exists when the debt instrument is reimbursed for an amount higher than its face value.

Its redemption/reimbursement provisions: These refer to the conditions in which the debt instruments may be repaid, for instance in tranches, equal installments or in one single payment at maturity.

Many investors choose bonds when they want a source of current income while seeking to preserve their capital. Bonds often are referred to as "fixed income" investments because they typically offer fixed interest payments and principal repayment. A bond must be repaid by its issuer, as well as make interest payments to the holder.

When you buy a government bond at its issuing date, and hold until the bond’s maturity date, the risk of loss for your investment is nearly zero. The only risk would be if an issuer defaults on payment. While possible, default by major world governments is highly improbable.

However, the risk of default is much higher with some corporate bonds.  In this case, the issuing company may be unable to repay its debts due to bankruptcy or other events.   To help the financial community evaluate this risk, corporate bonds are rated by an independent rating service, such as Standard & Poor's, Moody's Investment Services, Inc.  or Fitch. These companies use letter grades ranging from triple-A (the highest) to D (in default) to evaluate a bond's credit quality.

Another consideration is the risk of relative loss if you sell a bond before its maturity date.  Depending on market conditions, the current price of the bond may be lower than the price at its issue date.  You would also lose interest that would have accrued between your selling date and the bond’s maturity date.

Types of Bonds

There are several different types of bonds, each with different characteristics.

Types of Bonds

There are several different types of bonds, each with different characteristics.

Understanding Credit Ratings

Before investing in bonds it is vital to understand how they are rated for quality

Understanding Credit Ratings

Before investing in bonds it is vital to understand how they are rated for quality

How to Choose a Bond

Choosing the right bond for you depends on your risk tolerance and financial goals. 

How to Choose a Bond

Choosing the right bond for you depends on your risk tolerance and financial goals. 

Why Investors Use Bonds

What are the benefits and drawbacks to trading bonds?

Why Investors Use Bonds

What are the benefits and drawbacks to trading bonds?

Important Terms

Learn the language: helpful terms you should know when investing in bonds.

Important Terms

Learn the language: helpful terms you should know when investing in bonds.

Bonds at NYSE Euronext

See all the bonds available across our markets.

Bonds at NYSE Euronext

See all the bonds available across our markets.

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