Bonds are debt securities that represents loans made by:
- companies (named as corporate bonds),
- states and municipalities (named as municipal bonds),
- nations (named as sovereign bonds).
Bond is a piece of a massive loan which borrows money from more than one source because of its amount.
Some common features of bonds:
- Face value (nominal, principal, par- amount) is the money amount the bond will be worth on its maturity, and is also the reference amount the bond issuer uses when calculating interest payments.
- Coupon rate (yield) is the rate of interest the bond issuer will pay on the face value of the bond, expressed as a percentage. Yield can be current (or running) and maturity.
- Coupon dates are the dates on which the bond issuer will make interest payments. Typically, coupon payments are issued annually or semi-annually.
- Maturity date is the date on which the bond will mature and the bond issuer will pay the bondholder the face value of the bond.
- Issue price is the price at which the bond issuer originally sells the bonds.
So, the issuer promises to pay the bond back on maturity date. Until then, the issuer makes coupon rate interest payments to the bondholder.
There are different types of bonds, some of them:
- Zero-coupon bonds don't pay out regular coupon payments. This type of bonds issued with the discount and their market price eventually converges to face value upon maturity.
- Convertible bonds are debt securities with an embedded call option. It means that bondholders can convert their bond into the issuer's common stock (equity securities) if the share price rises to the appropriate level.
- Exchangeable bonds allow exchange to shares of a corporation other than the issuer.
The majority of corporate bonds in today's market are so-called bullet bonds, with no embedded options and a face value that is paid immediately on the maturity date.
Bonds and other fixed-income securities play a critical role in an investor's portfolio. Owning bonds helps to diversify a portfolio, as the bond market doesn't rise or fall alongside the stock market. More important, bonds are generally less volatile than stocks, and are usually viewed as a "safer" investment.