Bonds refer to debt securities. The holder of a bond is referred to as the lender or creditor and issuer of the bond is the borrower or debtor. Bonds and stocks are all securities the difference being stockholders or owners of a company while bondholders are deemed to be lenders to a company. Bonds have maturity and are redeemable while stocks are indefinite. Bonds have a lower return rate or profit yield but have the advantage of giving stability from common market fluctuations experienced by stocks. Many investors have the capability of taking up on bigger risks courtesy of a higher level of bonds in their portfolio.
Issuance of Bonds
Investors are urged to take up a combination of both bonds and stocks to create a balanced portfolio. Bonds can be issued by public authorities, companies or credit institutions but most commonly bonds are issued through underwriting. Corporate bonds come in specific denominations and a certain level of maturities. Governments issue bonds as treasury bonds which are viewed to be the most secure. In underwriting firms and banks buy the bonds from various issuers and resell to investors. Government bonds are mostly done as public sales and through auctions and public individual and banks are all allowed to bid.
Features and Bond Basics
Bonds have varied certain features as follows
-Quality of the issued bond, they vary in quality in regard to their level of yield, high rating, and probable value of the bond
-The nominal value upon which the investor pays for including the redemption amount.
-Coupon which is an interest rate that is fixed on the bond and is paid by the issuer to the bond holder
-Maturity date implies the length of time and tenor under which the bond is issued under.
-The issue price referring to the amount that the bond is purchased and includes the nominal amount from when it was first issued.
Demystifying Yield for Bonds
Yield refers to the amount of worth that can be derived from the issued bonds or the worth of the security held by the bond. Three types of yields are highlighted namely
-Nominal yield refers to the amount on which interest is paid though it does not reflect the original amount to be received upon maturity
– Current yield this refers to the current market price of the bond as opposed to its face value amount thus indicating a higher yield in event of maturity.
– Yield to Maturity takes into account all factors the current market price, the coupon rate the total interests all are calculated to generate a total yield for the bond.
Bonds play a critical role in balancing portfolios and general economies. Investors are thus encouraged to take on bonds and stocks concurrently. Returns on bonds may be lower compared to stocks but they are safer protected ways of investing in securities. Interest rate of bonds can be quantified by the level of its duration.