about the financial derivative instrument

2.  a bond is an instrument of indebtedness of the bond issuer
to the holders.
 It is a debt security, under which the issuer owes the
holders a debt and, depending on the terms of the bond, is
obliged to pay them interest (the coupon) and/or to repay
the principal at a later date, termed the maturity
 Interest is usually payable at fixed intervals (semiannual,
annual, sometimes monthly).
 Thus a bond is a form of loan or IOU: the holder of the
bond is the lender (creditor), the issuer of the bond is the
borrower (debtor), and the coupon is the interest.
 Bonds provide the borrower with external funds to finance
long-term investments, or, in the case of government
bonds, to finance current expenditure.

3.  Bonds and stocks are both securities, but the
major difference between the two is that
(capital) stockholders have an equity stake in
the company (i.e. they are owners), whereas
bondholders have a creditor stake in the
company (i.e. they are lenders).
 Another difference is that bonds usually have
a defined term, or maturity, after which the
bond is redeemed, whereas stocks may be
outstanding indefinitely. An exception is an
irredeemable bond, such as Consols, which is
a perpetuity, i.e. a bond with no maturity

4.  A debenture is a document that either creates a debt or
acknowledges it, and it is a debt without collateral.
 In corporate finance, the term is used for a medium- to long-
term debt instrument used by large companies to borrow money.
 In some countries the term is used interchangeably
with bond, loan stock or note.
 A debenture is thus like a certificate of loan or a loan bond
evidencing the fact that the company is liable to pay a specified
amount with interest and although the money raised by the
debentures becomes a part of the company's capital structure, it
does not become share capital.
 Debentures are generally freely transferable by the debenture
holder. Debenture holders have no rights to vote in the company's
general meetings of shareholders, but they may have separate
meetings or votes
 e.g. on changes to the rights attached to the debentures. The
interest paid to them is a charge against profit in the
company's financial statements

5. It is a debt security, under which the issuer
owes the holders a debt and, depending on
the terms of the bond, is obliged to pay them
interest (the coupon) and/or to repay the
principal at a later date, termed the maturity.
 Interest is usually payable at fixed intervals
(semiannual, annual, sometimes monthly).

6. Principal
Nominal, principal, par or face amount — the amount on which the issuer pays interest,
and which, most commonly, has to be repaid at the end of the term
Maturity
The issuer has to repay the nominal amount on the maturity date. As long as all due
payments have been made, the issuer has no further obligations to the bond holders after
the maturity date. The length of time until the maturity date is often referred to as the
term or tenor or maturity of a bond.
Coupon
The coupon is the interest rate that the issuer pays to the bond holders. Usually this rate
is fixed throughout the life of the bond. Interest can be paid at different frequencies:
generally semi-annual, i.e. every 6 months, or annual
Yield
The yield is the rate of return received from investing in the bond

7. 1. Zero-Coupon Bonds:
 This is a type of bond that makes no coupon payments but instead is
issued at a considerable discount to par value. For example, let's say a
zero-coupon bond with a $1,000 par value and 10 years to maturity is
trading at $600; you'd be paying $600 today for a bond that will be worth
$1,000 in 10 years.
 The issue price of Zero Coupon Bonds is inversely related to their
maturity period, i.e. longer the maturity period lesser would be the issue
price and vice-versa. These types of bonds are also known as Deep
Discount Bonds.

8. 2. High-Yield Bonds:
 High yield (non-investment grade) bonds are from issuers that are considered
to be at greater risk of not paying interest and/or returning principal at
maturity. As a result, the issuer will offer a higher yield than a similar bond of
a higher credit rating and, typically, a higher coupon rate to entice investors
to take on the added risk.
3. Corporate Bonds:
 These are issued by large corporations and have higher yields because there
is a higher risk of a company defaulting as compared to government bonds.

9. 4. Government Bonds:
 These are the bonds issued by government in its own currency. They are
usually referred to as risk-free bonds. Bonds issued by national governments
in foreign currencies are referred to as sovereign bonds.
5. Convertible Bonds:
 The holder of a convertible bond has the option to convert the bond into
equity (in the same value as of the bond) of the issuing firm (borrowing
firm) on pre-specified terms.
 Convertible bonds may be fully or partly convertible. For the part of the
convertible bond which is redeemed, the investor receives equity shares
and the non-converted part remains as a bond.

10. 6. Inflation-indexed (or inflation-linked) Bond:
 It provides protection against inflation, and is designed to cut out the
inflation risk of an investment.
7. Extendible and Retractable Bonds:
 Extendible and Retractable bonds have no fixed maturity date.
 While the maturity period of extendible bonds can be extended on the
demand of the buyer of these bonds, the maturity period of retractable bond
can be reduced and the principal amount returned to the buyer if he feels so.

11. 8. Floating Rate Bonds:
 Floating Rate Notes are bonds in which interest rate depends on the interest
rate prevailing in the market. The interest rate paid to the bondholder at
regular intervals comprises of the interest rate prevailing in the market and
‘spread’, which is a rate that is fixed when the prices of the bond are being
fixed and it remains constant till the maturity period of the bond.
9.Perpetual Bonds:
 Perpetual Bonds, which are also known as the name of Consol, are the
bonds which have no maturity period and keep on paying interest to the
investors regularly. The issuer of Perpetual Bonds is not required to
redeem these bonds. They are generally treated as equity and not as loan
/ debt.
Some other Types of bonds:
Asset Backed Securities, subordinated bonds, Bearer Bonds,
Municipal Bonds, Lottery Bonds, War Bonds.

13. 1. SECURITY
 Secured/ Mortgage
 Unsecured
2. REDEMPTION
 Redeemable
 Irredeemable

14. 3. RECORDS
• Registered
• Bearer
4. CONVERTIBILITY
• Convertible
• Non-convertible
5. PRIORITY
• First
• Second

16. Investors consider debentures/bonds as a
relatively less risky investment, therefore
it requires a lower rate of return.
Interest payments are tax deductible.
The floatation costs on debentures/bonds
is usually lower than floatation costs on
common shares

17.  No voting rights therefore no dilution of
ownership.
 Debenture/bomd holders do not participate in
extraordinary earnings of the company. Thus
their payments are limited to interest.
 During periods of high inflation,
debenture/bond issue benefits the company. Its
obligations of paying interest and principal,
which remain fixed, decline in real terms.

19.  Their issue results in legal obligation of paying
interest and principal, which, if not paid can
force the company into liquidation.
 Their issue increases the firm's financial
leverage and reduces its ability to borrow in
future.
 They must be paid at maturity and therefore at
some point, it involves substantial cash
outflows.
 They may contain restrictive covenants which
may limit the firm's operating flexibility in
future.