What is a Bond in finance
What is a bonds in finance or written agreement on which terms the deal was signed is the specific fixed amount given out to investors by an individual usually debtors for the loan given to them for the purpose of the individual to finance his business. These investors are the creditor.
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There are different types of bonds and bonds issued by government or a company. The bond issuers which can be government, companies, corporation issues the bond for the purpose of using the money given by the investors to run the affair of the company or corporation. Some individuals engage in debt financing to finance their business. The bondholders are the creditors of the issuers of the debt.
What is bond in finance are simply one of the three major funds or capital generating class. The others are the stocks in equity financing and cash equivalents. There are different terms for bonds vs stocks. Most economist refer to bond definition as a fixed-income security. A company issues bond when it needs funds to restructure the company, start new projects, and make an investment and also to pay off debt. In the bond issues, the terms and conditions which states when the debt would be paid and the interest which is referred to as coupon rate are stated.
The coupon rate is the profit of a bondholder for lending funds out to the bonds issuer. The coupon rate usually depends on the market factors and the length of time for expiration. The coupon rate also depends on the amount of bonds issued out to the creditor. Bond price is usually from $100 to $1000 per individual bond and it is issued in per. For example, a company might decide to sell fifty bonds with rate of one being $150 and a coupon rate of 1%. An investor that buys the whole fifty bonds has his coupon rate being 50% after the payment of $7,500 for the bonds issued out by the issuer.
There are two main feature of bond market. Bond has credit quality and duration. The duration is the time the bond is going to last. Duration determines the interest rate on the bond. The longer the duration of the bond, the higher the coupon rate. Credit quality shows the value of the bond to be issued to the creditors or investors. The higher the value or quality of the bond, the lower the coupon. For example, a company that has 50 bonds to issues and decide to issue a bond for $250 with a coupon rate of 1%. An investor that buy the whole 50 bonds at the amount of $12,000 and have a coupon rate of 50%.
When another company follows the same pattern but this time decides to sell per $150 for the coupon rate of 1%. Same investor buy the whole 50 bonds and have a coupon rate of 50%. The investor discovered that the $7,500 should earn him lower coupon and the $12,000 should earn him higher coupon rate but sees that they were still giving him the same coupon rate. So he had decide to buy the one with lower value to have a higher coupon rate.
Types of bonds
Just like we have three main categories of finance, we also have three main categories or types of bonds.
- Municipal or government bonds: These are issued by the government in public finance to run the affairs of the state.
- Corporate bonds: These are issued by corporations to run the finance of a company. This is studied under corporate finance using the debt financing structure
- Personal bonds: These category of bond is issued by an individual.
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Varieties of Bonds
Zero-coupon bonds are debt instrument that do not let the company pay out the coupon rate on a regular basis but rather makes them pay in discount but at the end of the maturity time, the discount amounts to the same coupon rate which is to be given by the company to its investors or bondholders.
Convertible bonds. These are bonds that can be converted to stocks I equity financing if the company decides to sell its shares and the shares rate has increased to the rate of the bonds. Convertible bonds are debt instruments that makes the investor to be able to get his bonds converted to stock in equity especially if the company runs both the debt financing and the equity financing.