Its contract between two parties in which borrower agrees to pay interest and principle at the decided time. Bonds are the long term security. If the company’s pay money then first of all they pay the bonds. Every bond comes with a booklet known as Indenture in which it’s all the terms and conditions are mentioned. In booklet it is mentioned that who is the trustee of the bond.
Characteristic of Bonds
Following are the Characteristics of Bonds:
1. Par Value
Par value is also known as face value because it is printed on the face of bond and along with that it is also known as maturity value.
Maturity is the time when the bond will get mature or retire. In case of bonds maturity is divided in to two forms:
2.1. Original Maturity
Original maturity is when the bond is issued for. e.g. 30 years.
2.2. Effective Maturity
If the bond is of 30 years then after 1 year its maturity left is 29 year and that maturity is known as effective maturity.
3. Coupon Rate
Interest rate paid in the form of semiannually.
4. Call Provision
Sometime companies insert a clause that bonds can be called back before their original maturity called or known as call provision. Such bonds are called callable bonds. Sometimes companies have to issue bonds when interest rates are high but later on when interest falls company uses call provisions to call back expensive bonds and issue lower coupon rate bonds, this process is known as refunding operation. Sometimes bonds cannot be called back until after sometime. This is called deferred call and bonds are said to be call protected in that period.
Company’s set aside some amount of bond every year that is known as sinking fund method. And some time company’s calls back certain Percentage of bonds every year.
By bond yield we mean bond returns. There are basically three types of bond returns.
a. Yield till Maturity
Yield till maturity means that if you buy a bond today at the price other than par value and keep it till maturity then the return on it is called as Yield till maturity.
b. Yield till Call
Yield till maturity is when you buy a bond today at a price other than par value and it get called by the company then the return on it is called as yield till call.
c. Current Yield
Current yield is the return of a bond in any single year.
Bond rating shows the probability of default; they are issued by the rating agencies. Internationally three rating agencies are renowned. Standard and Poor’s , Moody’s and Fitch Investor Service.
December 05, 2018