What is a Bond?
Questions may arise in your mind that what is a bond. A bond is a financial instrument used by the government or corporations to collect money from the market. It provides a fixed benefit to the bondholders periodically and also at the time of maturity. Although the use of bonds as a financing instrument used in developed countries and is very popular around the world. But in Bangladesh the use of the bond not getting enough popularity yet.
By selling a bond, borrowers make a contract with the buyer to pay interest and principal at the time of maturity. All provisions, terms & conditions are written in the bond indenture. A bond indenture is the written document where all terms are clearly mentioned which actually helps to ensure the right of the bondholders.
Basically, a bond pays interest semi-annually to the bondholders at the specific rate which is mentioned in the bond indenture.
Bonds with the maturity of 10 years or more are considered as long-term bonds. The interest of the bond is set on the basis of the market interest rate. Every bond has coupon rates (except zero-coupon bonds), maturity date, and face value (basically Tk 1000). Some may have call provision and convertible features.
There is an inverse relationship between the interest rate (market interest) and the price of the bond. Higher interest rates lower the price of the bond and vice versa. We get the price of the bond by discounting the cash and capital gain received from the bond by the required rates of return. Normally large companies issue a bond for the purpose of collecting long-term funds from the market.
Basic Characteristics of Bond
From above-mentioned issues we can draw some basic characteristics of a bond, these are:
- Bond is a long-term financial instrument issued by large companies to collect long-term funds.
- Every bond must have a face value, maturity value, and coupon rate and maturity period.
- It provides periodical benefit to the holders (basically for an interval of six months).
- The terms and conditions are written in the bond indenture.
- Zero-coupon bonds do not provide any coupon/interest. It provides benefits at the maturity where the bond is issued at discount.
- There is an inverse relationship between the interest and price of the bond.
- The callable or convertible feature is common for a bond.
Actually, the characteristics of a bond are dependent upon the types of a bond which is being issued and where it is issued. Country to country the type and features of the bond vary.