Bonds are debt securities issued by corporations, governments and municipalities. When investing in bonds,
investors lend money to an entity and in return receive interest payments. The corporation is obligated to
return the principal to investors on a predetermined date in the future. When purchasing bonds, investors
become creditors of the issuer, therefore, having priority claim on the issuer’s assets in the event of
Characteristics of Bonds:
Par or face value is the bond’s denomination and the amount returned to the investor upon maturity. Par is not
the price of the bond. The price fluctuates throughout the lifetime of the bond. If the price is above par, the
bond is selling at a premium. If the price is below par, the bond is selling at a discount. Price is generally
quoted in percentage of face value. For example, a price of 97 means 97% of the bond’s $1,000 par value or
Coupon rate (or the coupon) is the interest rate paid to investors as compensation for the loan. Coupon
payments are generally made semi-annually unless otherwise stated. Some investors can depend on this
Maturity is the term of the bond’s life. Bonds range in maturity from three months to 100 years. On the
maturity date, the bond's face value is repaid to the investor and the interest payments stop.
Call features are issued with some bonds and give the issuer, at its discretion, an option to redeem the bond
prior to the maturity date. The bonds become callable when the situation is most beneficial for the issuer.
Generally bonds are called when market interest rates fall, allowing the corporation to issue new bonds with a
lower coupon rate. For taking on the risk of a possible call prior to maturity, investors are usually compensated
with a potentially higher return at the time of purchase.
Credit rating is a reflection of a company’s credit worthiness. Just like individuals, corporations with poor credit
have difficulty finding financing at lower costs. “Junk bonds” or high-yield bonds have a higher risk of default
and, therefore, must offer investors a higher stated return on the borrowed money. High-yield bonds (below
investment grade) are not suitable for all investors.
Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest
rates rise and are subject to availability and change in price.
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