A bond is a debt security, in which the issuer owes the holders a debt and is obliged to pay them interest (coupons) or to repay the principal at a later date, termed the maturity date. Bonds are issued by public authorities, credit institutions, companies and supranational institutions in the primary markets. The bond is then traded in the secondary market, where investors can buy and sell bonds. The ownership of the bond gives the holder a creditor relationship with respect to the issuer.
The most common types of bonds include government bonds, corporate bonds, and municipal bonds.
Government bonds are debt securities issued by national governments. Corporate bonds are debt securities issued by private corporations. Municipal bonds are debt securities issued by state and local governments.
Bonds are typically issued in denominations of $1,000, $5,000, $10,000, and $100,000. Interest on bonds is typically paid semiannually. The principal of a bond is the face value or par value of the bond. The coupon rate is the annual interest rate paid on a bond.
Maturity date is the date on which the bond expires and the debt must be repaid in full. Yield to maturity (YTM) is the total return expected on a bond if held until maturity. Yield to call (YTC) is the total return expected on a bond if held until its call date.
Investors typically purchase bonds for one of two reasons:
– To receive interest payments (coupons) as income
– To capitalize on capital appreciation (price appreciation) if the bond is sold prior to maturity