What is a Bond?

A bond is a debt instrument used by corporations and governments to borrow money from investors.

How it Works

A company may require funding for a proposed project.

One way for the company to raise money for this is by issuing bonds.

When issuing a bond, a company needs to offer some form of security.

Providing the company can meet this criteria, it can ’sell’ its bonds to investors.

Each bond in the issue will have a certain face value.

This is how much the company will need to pay the bond holder — at the end of the bond term.

The bond term is the time from issue to maturity.

Each year, the issuing company pays interest on the bond.

The interest paid will be in accordance with the bond’s coupon or stated rate.

Furthermore, typically, bond interest is paid semi-annually.

12 When issuing their bond, the bond’s issuer will consider the current level of interest rates.

The issuer will  set their bond’s coupon rate at or around this level.

Then they issue the bond at what is known as par value.

© R.J. Hickman 2020