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What is a Bond ?

Bonds are debt investment instruments through which investors give out loans to government and corporate entities. The latter borrow funding at fixed interest and for a specified period. Bonds are a main asset class, together with cash equivalents and stocks. They also fall under the category of fixed-income securities. The issuer or the indebted entity issues bonds with certain interest rate, which are payable at the maturity date of the bond principal (the loaned money). Bonds earn interest which is typically paid semi-annually, i.e. twice a year.

Basically, a bond is similar to a loan, whereby the holder is a creditor and the issuer is debtor. The funds can be used to finance current expenditure, e.g. government bonds, or long-term investments. Three features of bonds should be mentioned, the bond principal, nominal, and face amount, on which borrowers pay interest. The redemption amount of some structured bonds may differ from the face amount. The redemption amount may be also linked to certain assets and their performance, such as a foreign exchange, commodity or stock index, or fund. Because of this, investors may receive more or less than what they originally invested.

The price at which bonds are bought by investors when issued is called issue price. It is usually roughly equal to the nominal amount. Issuers receive net proceeds in the form of the issue price, minus the issuance fees. The date of maturity is the date on which the nominal amount is to be repaid by the issuer. In case the issuer has made all payments, it does not have any obligations to the bond holders. Bonds vary with regard to maturities. For example, some bonds have a maturity of one hundred years, and some will never mature. Maturity is one factor that determines the type of security. Bonds are long-term instruments with maturities of over 12 years while notes are medium term instruments with maturities in the range of 6 – 12 years.
 
 

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