Sunday, September 11, 2016

Bond Definition


Bond is a type of loan that is broken down into small pieces and issued to the general public. Usually, these are listed on popular stock exchanges and are freely tradable in the open market.

As in any loan, the bond specifies:
  1. Face value of the bond
  2. The rate of interest or coupon rate
  3. Frequency of payment of interest – quarterly or half yearly or annually
  4. Date of redemption or repayment or maturity

Bonds can be unsecured or secured by specific assets or a non-specific, generally secured by overall assets of the company.

Sometimes bonds are issued with an option to the investor to convert the bond into an equity share of the company at a certain pre-specified price. Such bonds are called convertible bonds.

Sometimes bonds are also called debentures. There are subtle differences between the two based on security, purpose and duration but they are different in different countries and many times used interchangeably.

In real investing stocks/ equity is the main investing instrument; bonds play an important but only a balancing role. They act as a counterweight. When stock prices/ stock markets are high you should invest in bonds. In the same vein, when the stock markets are depressed you should switch over to stocks and dump investing in bonds.

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