Bonds

What are Bonds?

A bond is a security that denotes the debt owed by the issuer to the bondholders and he is liable to pay the coupon (an interest) on the same or repay the actual amount in the future and these are also negotiable and here interest can be paid monthly, quarterly, half-yearly or even annually.

Market Price of Bond

The market price of a bond is the present value of all expected future principal and interest payments of the bonds discounted at the bonds yield to maturity (rate of return). It is to be noted that the yield and price of the bond are inversely related so that when the market rate rises, prices of the bond will fall and vice-versa.

The success of a bond is measured depending on the yield which they offer. Yield is the annual percentage of return earned on a security.

The current yield of the bondCurrent Yield Of The BondThe current yield formula essentially calculates the yield on a bond based on the market price instead of face value. The current yield of bond= Annual coupon payment/current market priceread more is computed as Annual Coupons / Current Bond Price.

For instance, if a bond was issued for $1,000 with an annual coupon of $100 but if it is selling in the market for $1,100, then the yield would be: 100/1100 = 9.09%

What-are-bonds

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Types of Bonds

Some of the popular types of bonds are:

Bonds Type

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Types of Risks

Bonds are subject to various types of risks, such as:

Changes in the prices of the bond have an immediate impact on the portfolio of securities as it offers relatively stable returns. Additionally, the price of the Government bond is very sensitive as it will depict the economic stability of the respective country. The prices can also be impacted by the credit rating agencies upgrade or downgrade.

Bond Indices

A number of bond indices exist for the management of portfolios and measuring performances such as:

Most of the indices are branches of other indices for measuring global bond portfolios or can be further subdivided for the management of customized portfolios depending on maturity or industry splits.

Conclusion

In financial terms, a bond is an instrument of debt from the bond issuer to the bondholder. It is security confirming debt, in which the issuer owes a debt to the holder and has an obligation for payment of the interest amount (coupon rate) at specified intervals or the making the entire principal amount at a later date on maturity. These interest amounts could be paid Annually, Semi-annually, or even monthly. The ownership of the bond is transferable in the secondary market, which makes it more liquid.

Recommended Articles

This has been a guide to what are bonds, the price of a bond, types of bonds, types of riks, and bond indices. You may also have a look at the following articles to learn more about fixed income –

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