Thursday, April 7, 2011

Basic Characteristics of Bonds

A bond is simply a type of loan taken out by companies, or a government. Investors lend a company money when they buy its bonds.
Coupon: This is the amount of interest due and the date on which payment is to be made. Where the coupon is blank, it can indicate that the bond can be a “zero-coupon,” a new issue, or that it is a variable-rate bond. The amount of interest paid to an investor (i.e. coupon payment) is calculated by multiplying the interest of the bond by its face value (i.e. The par value of a security, as distinct from its market value).
The maturity date of a bond is the date when the principal, or par, amount of the bond will be paid to investors, and the company's bond obligation will end.
A bond can be
secured or unsecured. Unsecured bonds are called debentures; their interest payments and return of principal are guaranteed only by the credit of the issuing company. If the company fails, you may get little of your investment back. On the other hand, a secured bond is a bond in which specific assets are pledged to bondholders if the company cannot repay the obligation.
Tax Status:
While the majority of corporate bonds are taxable investments, there are some government and municipal bonds that are tax exempt, meaning that income and capital gains realized on the bonds are not subject to the usual state and federal taxation.
Because investors do not have to pay taxes on returns, tax-exempt bonds will have lower interest than equivalent taxable bonds. An investor must calculate the 
tax-equivalent yield to compare the return with that of taxable instruments.
Some bonds can be paid off by an issuer before maturity. If a bond has a
call provision, it may be paid off at earlier dates, at the option of the company, usually at a slight premium to par.

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