BONDDefinitionA debt instrument issued for a period of more than one year with thepurpose of raising capital by borrowing. The Federal government, states,cities, corporations, and many other types of institutions sell bonds.Generally, a bond is a promise to repay the principal along withinterest (coupons) on a specified date (maturity). Some bonds do notpay interest, but all bonds require a repayment of principal. When aninvestor buys a bond, he/she becomes a creditor of the issuer. However,the buyer does not gain any kind of ownership rights to the issuer, unlikein the case of equities. On the hand, a bond holder has a greater claim onan issuers income than a shareholder in the case of financial distress(this is true for all creditors). Bonds are often divided into differentcategories based on tax status, credit quality, issuer type, maturity andsecured/unsecured (and there are several other ways to classify bonds aswell). U.S. Treasury bonds are generally considered the safest unsecuredbonds, since the possibility of the Treasury defaulting on payments isalmost zero. The yield from a bond is made up of three components:coupon interest, capital gains and interest on interest (if a bond pays nocoupon interest, the only yield will be capital gains). A bond might besold at above or below par (the amount paid out at maturity), but themarket price will approach par value as the bond approaches maturity. Ariskier bond has to provide a higher payout to compensate for thatadditional risk. Some bonds are tax-exempt, and these are typicallyissued by municipal, county or state governments, whose interestpayments are not subject to federal income tax, and sometimes alsostate.
BOND VALUEDefinitionThe value that a convertible bond would have if it was no longer convertible. Thebond value represents the market value of the bond less the value of the conversionoption.BOND VALUATIONDefinitionThe act of evaluating certain aspects of a bond such as the interest rate,possible yield, and maturity date to determine the fair value of thesecurity. What Does Bond Valuation Mean? A technique for determining the fair value of a particular bond. Bond valuation includes calculating the present value of the bonds future interest payments, also known as its cash flow, and the bonds value upon maturity, also known as its face value or par value. Because a bonds par value and interest payments are fixed, an investor uses bond valuation to determine what rate of return is required for an investment in a particular bond to be worthwhile. Investopedia explains Bond Valuation Bond valuation is only one of the factors investors consider in determining whether to invest in a particular
bond. Other important considerations are: the issuing companys creditworthiness, which determines whether a bond is investment-grade or junk; the bonds price appreciation potential, as determined by the issuing companys growth prospects; and prevailing market interest rates and whether they are projected to go up or down in the future.Question: What Are Bonds?Answer: Bonds are another word for loans taken out by large organizations, such ascorporations, cities, and the U.S. Government. Since these entities are so large, they needto borrow the money from more than one person or bank.Therefore, bonds are a piece of a really big loan. The borrowing organization promises topay the bond back, and pays interest during the term of the bond. Since largeorganizations dont like to actually say they are borrowing money, they say they areselling bonds...presumably because it sounds better.Like loans, bonds return interest payments to the bond holder. In the old days, whenpeople actually held paper bonds, they would redeem the interest payments by clippingcoupons. Today, most bonds are held by the financial planning institution, and interest isautomatically accrued for the life of the bond.Bonds are usually resold before they mature, or reach the end of the loan period. This ishow bonds rise and fall in value. Since bonds return a fixed interest payment, they tend tolook more attractive when the economy and stocks market decline. When the stockmarket is doing well, investors are less interested in purchasing bonds, and their valuedrops.Like stocks, bonds can be packaged into a bond mutual fund. This is a good way for anindividual investor to let an experienced mutual fund manager pick the best selection of
corporate bonds. A bond fund can also reduce risk through diversification. This way, ifone corporation defaults on its bonds, then only a small part of the investment is lost.