What is Bond?
Definition of Bond
A bond is an instrument of debt investment in which investor loans money to governmental or corporate entity, which borrows the funds for the specific time period at fixed or variable interest rate. They are used by sovereign governments, states, companies, and municipalities in order to raise money and finance different kinds of activities and projects.
Explanation of Bond
They are commonly known as fixed income securities and are one of the 3 main generic asset classes, along with cash equivalents and stocks. Most of the government and corporate bonds are publicly traded on exchanges, while others are traded only over the counter (OTC).
When companies need funds for new projects, ongoing operations, and refinance other debts, they may issue bonds directly to investors instead of bank loan. The issuer, issue the bond with a contract which states the interest rate and maturity of the bond.
The price of the bond is typically set at par, usually $100, having a face value of $1,000 per individual-bond. There are a number of factors which affect the market price of such bond as the credit quality of the issuer, coupon rate comparison with general interest rate, and maturity.
Zero coupon bonds do not pay coupon payments on a regular basis and they are issued at discounted rate. It rendered the profit at the time of maturity when it will be redeemed at its full face value. On the other hand, convertible bonds allow bondholder to make the conversion of debt into stock if the share price is attractive enough to make this conversion feasible. Some of the corporate bonds are callable, and company can recall the bond from the bond holder if the rate of interest drops sufficiently. Some bonds have put option and they can be returned to the issuer form the bond holder, if the interest rate increases.