| What
is a bond?
A
bond is basically an IOU, a debt instrument for a loan which
is issued by a borrower to an investor who is the buyer of
the bond and lender of the monies. In return for the monies,
the issuer agrees to pay regular interest to the bondholder
for the term of the loan and the principal sum borrowed upon
maturity. However the buyer does not have to hold the bond
until maturity; he can sell it anytime before maturity if
he wishes. Thus bonds are tradable assets i.e. can be bought
and sold among investors.
The
basic characteristics of a bond are:
 |
A
maturity date - date the amount borrowed must be repaid; |
|
A
stipulated rate of interest payment or coupon rate - the
coupon rate is normally a fixed rate though interest can
be paid on a floating rate basis according to a pre-agreed
formula; |
|
the
face or par value (principal sum) redeemable upon maturity. |
Bonds
are often referred to as 'fixed income' securities because
the investor knows how much he will get back on maturity. |
