Bond Features and Definitions
From FXPedia
A bond is a type of debt or loan that obligates one party to provide repayment of the amount borrowed (i.e. the principle) plus interest at the end of the agreement. Bonds are classified as fixed income securities as they provide a guaranteed (or fixed) rate of repayment.
Bonds are typically issued by governments, financial institutions, and larger corporations. Bonds differ from stocks in that no ownership of the underlying entity is transferred as is the case when equity stocks are purchased. For example, a municipal government may opt to issue a new bond series in order to generate the funds necessary to undertake the building of a subway system or other public project. By issuing bonds, the government guarantees to repay the buyer of the bond the full principle plus the interest earned.
Government bonds are considered very safe investments as governments can, theoretically at least, increase taxes as needed in order to repay the bonds. There is a very active secondary bond market – also known as the fixed income market – that deals almost exclusively with the buying and selling of government bonds.
The following terms are commonly used in the bond industry:
| Face, Nominal Amount, or Principle | The amount upon which the buyer is required to pay interest and the amount that must be repaid at the end of the term. Coupon The interest rate that the buyer must pay to the seller on the original principle amount. |
| Coupon Dates | The dates that the buyer must pay accrued interest. Common coupon dates vary from monthly, quarterly, semi-annually, annually, or at maturity. |
| Maturity Date | The date at which the bond expires or matures. This is the date that the buyer must repay the principle amount in addition to any outstanding interest payments. Maturity lengths can vary with short-term being one year or less and long-term bonds being up to 20 years or occasionally, even longer. |
The bond yield curve is a commonly-quoted economic indicator based on the plots of the return of fixed income instruments. The shape of the curve illustrates the relationship between the expected yields and time to maturity. See Yield Curve for more information.
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