What are bonds?
Bonds are Debt Instruments which provide a regular stream of income to investors through repayment of borrowed money with interest at fixed intervals (coupons) over a particular period (tenor).
Who are the common issuers of bonds and what is the purpose of issuing the bonds?
The common issuers of bonds include Governments and companies to raise funds for their various activities. This makes them borrowers/debtors.
On the other hand, investors and institutions are known as lenders/creditors as they lend money to the
bond issuers by purchasing the bonds in return for interest.
What are the key characteristics to consider when choosing a bond?
There are three key characteristics to consider when choosing a bond. They are:
- the term or tenor of the bond
- the legal structure of the bond
- the interest rate or coupon payments
What is the interest rate or coupon?
The interest rate or coupon is the interest paid by the bond issuer to the bond holder for the use of their money over the term of the bond. They are usually paid on a regular basis, ranging from quarterly, semi-annually, or annually.
What is the interest rate or coupon?
Retail Bonds play a significant role in your wealth accumulation by:
- Offering safety and stability in your investment portfolio by balancing out equity market effects.
- Retaining the ability to provide consistent returns even during times of market volatility.
- Providing an avenue for capital preservation when bonds are held until maturity.
- Presenting potentially higher interest rates when compared to deposits with possible capital appreciation.
GLOSSARY
- Coupon: The interest payments a bondholder receives until the bond matures.
- Corporate bond: Debt instrument issued by a company, distinct from one issued by a government or government agency.
- Credit risk: The risk of loss of principal or loss of coupon payments stemming from a borrower's failure to repay a loan or otherwise meet a contractual obligation.
- Credit spread: The yield differential between a corporate bond and an equivalent maturity sovereign bond. For example, if the 10-year Treasury note is trading at a yield of 2% and a 10-year corporate bond is trading at a yield of 4%, the credit spread is 2% or 200bps.
- Fallen angel: An investment-grade company that has subsequently had its debt downgraded to speculative grade.
- Interest rate risk: When interest rates rise, the market value of fixed-income securities (such as bonds) declines. Similarly, when interest rates decline, the market value of fixed-income securities increases.
- Maturity: The number of years left until a bond repays its principal to investors.
- Rising star: A company whose bond rating has been increased by a credit rating agency due to an improvement in credit quality.
- Yield: The income return or interest received from a bond
