Financial Bonds
A bond is a contractual agreement between a lender (bondholder) and a borrower (issuer) where the issuer borrows funds from the bondholders. Bonds are a type of debt security, distinct from stocks which represent ownership in a company. Bondholders have a creditor status and are entitled to receive interest payments and repayment of principal according to the terms of the bond contract.
Types of Bonds
Corporate Bonds: Issued by corporations to raise capital for various purposes such as expansion or operational needs. Investors lend money to the corporation in exchange for regular interest payments and repayment of principal.
Municipal Bonds: Issued by local governments to fund public projects like infrastructure development or community services. Municipal bonds offer tax advantages and are generally considered safe investments.
Characteristics of Bonds
- Interest Payments: Bonds typically pay fixed or variable interest at regular intervals (e.g., semi-annually, quarterly).
- Maturity: Bonds have a specified maturity date when the principal amount is repaid to bondholders. Some bonds may be irredeemable, meaning they have no maturity date.
- Transferability: Bonds are often negotiable instruments, allowing holders to sell them on secondary markets for liquidity.
Issuance Process
Bonds are issued on the primary market by public authorities, corporations, or multinational entities:
- Underwriting: Large financial institutions (underwriters) ensure the issuance proceeds smoothly by guaranteeing payment if the issuer defaults. Underwriters charge fees for this service.
- Investment Process: Once issued, bonds can be purchased through a book runner, facilitating transactions between issuers and investors.
Municipal Bonds Auctions
Municipal bonds are sometimes issued through auctions:
- Participant Diversity: Anyone, including NBFCs, banks, and individual investors, can participate in these auctions.
- Pricing: Bond prices and interest rates (coupons) are determined based on market conditions and the bond’s maturity period.