http://valuationacademy.com Introduction to Bonds — Valuation Academy

Introduction to Bonds

A bond exists as a debt investment in which an investor loans out money to an entity that will borrow those funds for a defined time period at a fixed interest rate.  Bonds are an important form of capital as governments, both foreign and domestic, companies, and businesses can finance projects and activities.  Investors will issue bonds with the goal of generating money through the fixed income rate.  The entity that is being lent money is required to pay the loaner back in full, along with the interest rate attached to the bond.  Issuing bonds is a form of investment in which individuals, companies, or governments can lend out money they have saved with expectations of growth through interest rates.

Bonds are often referred to as fixed-income securities and are considered one of the three in the main asset classes, along with stocks and cash equivalents.  The indebted entity is referred to as the issuer, the interest rate is referred to as the coupon, and the date in which the bond needs to be paid back is the date of maturity.  The interest rate is usually paid every six-months.  There exist different kinds of bonds that are issued.  The main categories of bonds are corporate bonds, municipal bonds, and U.S. treasury bonds, notes and bills.  The treasury bonds are most commonly known as simply treasuries.

There are two features of bonds that act as the main principle of determinants of a bonds interest rates, credit quality and duration.  Bond maturities range from 90-day Treasury bill to a 20-year government bond.  Corporate and municipals are different; they usually range from three to ten year bonds.  If the bond cannot be paid back in full, it is will have considered to be defaulted.