A bond is just like a loan. The holder of the bond is the lender or creditor. The issuer of the bond is the borrower or debtor. The bondholder has a higher right over the residual assets of a Company when compared to the shareholders of the Company. If a Company goes bankrupt, the bondholder has a higher claim on the assets of the firm vis-à-vis shareholders. The bondholder has no share in the profits of the firm.
There are three main things to know about any bond before buying it, they are;
1. Par value
2. Coupon rate
3. Maturity date
Knowing these three items allows examining the bond and comparing it to other potential investments.
Par value is the quantity of money the investor will receive once the bond matures, it means that the entity that sold the bond will return to the investor the original amount that it was loaned, called the principal.
The coupon rate is the amount of interest that the bondholder will accept expressed as a percentage of the par value. The bond will also state when the interest is to be paid, whether monthly, quarterly, semi-annually or annually.
The maturity date is the date when the bond issuer has to pay back the principal to the lender. After the debtor pays back the principal, it is no longer obligated to make interest payments. Occasionally a company will decide to "call" its bond, meaning that it is giving the lenders their money back previous to the maturity date of the bond. All corporate bonds state whether they can be called and how soon they can be called.
If organization holds a bond to maturity, it won’t lose its principal as long as the borrower doesn't default. If it buy and sell bonds before it mature, it can make or lose money on the bonds completely separate from the interest rates. How much more it is going to get depends on the exact maturity date of the bond, where interest rates have moved, and the transaction costs involved.
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