Bond

<body onLoad="MM_checkPlugin('Shockwave Flash','','http://www.riskglossary.com/default_nofl.htm',false);return document.MM_returnValue" stylesrc="../_private/template.htm" bgcolor="#FFFFFF" link="#669933" vlink="#000000" alink="#000000"> <div align="left"> <table border="0" cellpadding="0" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="100%" id="table1"> <tr> <td width="740"> <table border="0" cellpadding="0" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="100%" height="37" id="table2"> <tr> <td height="35" width="100%"> <table border="0" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="100%" cellpadding="0" id="table3"> <tr> <td width="100%" align="left" valign="top"> <p class="header_gold">Bond</td> <td width="45" align="right" valign="bottom"> <map name="FPMap6"> <area href="http://www.contingencyanalysis.com" shape="rect" coords="1, 0, 44, 11" target="_top"> </map> <img border="0" src="../images/home.gif" usemap="#FPMap6" width="45" height="12"></td> </tr> </table> </td> </tr> <tr> <td width="100%" bgcolor="#CC9966" height="2"> <img border="0" src="../images/blank_2x2.gif" width="2" height="2"></td> </tr> <tr> <td width="0%" valign="top" bgcolor="#FFFFCC"> <table border="0" style="border-collapse: collapse" bordercolor="#111111" width="100%" cellpadding="0" cellspacing="1" id="table4"> <tr> <td width="0%" align="left" valign="top"> <p class="header2_black">Explained:<br> <img border="0" src="../images/blank_1x100.gif" width="100" height="1"></td> <td width="0%" align="left" valign="top"><p class="word_list"> <a href="#bond">bond</a><p class="word_list"> <a href="#coupons">coupon</a><p class="word_list"> <a href="#coupon bonds">coupon bond</a><p class="word_list"> <a href="#deed of trust">deed of trust</a><br> <img border="0" src="../images/blank_1x160.gif" width="160" height="1"></td> <td width="100%" align="left" valign="top"><p class="word_list"> <a href="#indenture">indenture</a><p class="word_list"> <a href="#note">note</a><p class="word_list"> <a href="#term">term</a><br> <img border="0" src="../images/blank_1x160.gif" width="160" height="1"></td> </tr> </table> </td> </tr> </table> <table border="0" cellpadding="0" style="border-collapse: collapse" bordercolor="#111111" width="310" align="right" id="table5"> <tr> <td align="right" width="9" height="14"></td> <td width="300" height="14"> <font size="2"> </font><font size="4"> </font></td> </tr> <tr> <td align="right" width="9"> </td> <td width="300"> <script type="text/javascript"></script> <script type="text/javascript" src="http://pagead2.googlesyndication.com/pagead/show_ads.js"> </script>  </td> </tr> </table> <p class="body">A <b><a name="bond">bond</a></b> is <a href="../articles/security.htm">securitized</a> debt. Just as debt can be structured in many different ways, so can bonds. They come in many forms, including:</p> <p class="bullet"><img border="0" src="../images/bullet.gif" width="20" height="10"><b><a name="coupon bonds">coupon bonds</a></b>,</p> <p class="bullet"><img border="0" src="../images/bullet.gif" width="20" height="10"><a href="../articles/zero_coupon_bond.htm">zero-coupon bonds</a>,</p> <p class="bullet"><img border="0" src="../images/bullet.gif" width="20" height="10">floating-rate bonds, more often called floating-rate notes,</p> <p class="bullet"><img border="0" src="../images/bullet.gif" width="20" height="10">inflation-adjusted bonds,</p> <p class="bullet"><img border="0" src="../images/bullet.gif" width="20" height="10"><a href="../articles/securitization.htm">securitized debt</a>, and</p> <p class="bullet"><img border="0" src="../images/bullet.gif" width="20" height="10">structured notes.</p> <p class="body">Bonds are issued to finance various entities, including</p> <p class="bullet"><img border="0" src="../images/bullet.gif" width="20" height="10">national governments,</p> <p class="bullet"><img border="0" src="../images/bullet.gif" width="20" height="10"><a href="../articles/agency_securities.htm">government agencies</a>,</p> <p class="bullet"><img border="0" src="../images/bullet.gif" width="20" height="10">state or local governments,</p> <p class="bullet"><img border="0" src="../images/bullet.gif" width="20" height="10">supranational entities, such as the World Bank, and</p> <p class="bullet"><img border="0" src="../images/bullet.gif" width="20" height="10"><a href="../articles/corporation.htm">corporations</a>.</p> <table border="0" cellpadding="0" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="345" align="left" id="table6"> <tr> <td width="336" height="14"><font size="2"> </font><font size="4"> </font></td> <td width="9" height="14"></td> </tr> <tr> <td width="336"> <script type="text/javascript"></script> <script type="text/javascript" src="http://pagead2.googlesyndication.com/pagead/show_ads.js"> </script>  </td> <td width="9"> </td> </tr> </table> <p class="body">When people speak of "bonds" without qualification, they are usually referring to traditional coupon bonds. This article provides an overview of bonds but with a specific focus on coupon bonds.</p> <p class="body">The contractual provisions of a bond are detailed in an <b> <a name="indenture">indenture</a></b>, which is also called the <b> <a name="deed of trust">deed of trust</a></b>. <span id="HtmlPlaceholderControl1" title="Content">This identifies a trustee who holds the indenture, supervises <a href="../articles/par_value.htm">principal</a> and interest payments, and represents bondholders in the event of default.</span></p> <p class="body">The bond issues at a price close to its <a href="../articles/par_value.htm">par value</a>, with the exact price determined by market conditions. After that, the issuer makes fixed periodic interest payments, called <b><a name="coupons">coupons</a></b>. Coupons are typically paid semiannually, but some bonds pay annual, quarterly or monthly coupons. Coupons continue to be paid until the bond's maturity date, at which time one final coupon is paid along with the bond's par value. </p> <div align="center"> <center> <table border="0" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="360" cellpadding="0" id="table7"> <tr> <td> <p class="exhibit_header"><span class="exhibit_header">Example: Cash Flows of a Coupon Bond</span><br> <span class="exhibit_subheader">Exhibit 1</span></td> </tr> <tr> <td bgcolor="#CC9966" height="2"> <img border="0" src="../images/blank_2x2.gif" width="2" height="2"></td> </tr> <tr> <td> <img border="0" src="../images/ex1_coupon_bond_a.gif" width="360" height="241"></td> </tr> <tr> <td> <p class="exhibit_legend">Cash flows for a 4.6% 20-year bond. The bond has a par value of <a href="../articles/currency_codes.htm">USD</a> 100. In this example, it issues below par at USD 98.2. It then makes semiannual coupon payments of USD 2.30. On the maturity date, a final coupon is paid along with the par value.</td> </tr> </table> </center> </div> <p class="body">A bond's <b><a name="term">term</a></b> is the length of time between its issuance date and maturity date. When people speak of a bond's maturity, they may be referring to its term, or they may mean the time remaining until it matures. Among discount and coupon-bearing instruments, only those with longer terms are called bonds. The criteria of "long-term" is not clearly demarked. In the corporate sector, instruments with terms of five or more years may be called bonds. In the US <a href="../articles/treasury_securities.htm">Treasury</a> market, instruments must have an original maturity exceeding ten years to be called a bond. </p> <p class="body">A <b><a name="note">note</a></b> is essentially a short-term bond. It is a coupon-bearing instrument with a term greater than nine months and up to ten years. These include <a href="../articles/medium_term_note.htm">medium-term notes</a> and <a href="../articles/treasury_note_and_bond.htm">Treasury notes</a>. A fixed income instrument with a term of less than a year would not be called a bond. These are money market instruments. They include <a href="../articles/treasury_bill.htm">T-bills</a>, <a href="../articles/commercial_paper.htm">commercial paper</a> and <a href="../articles/bankers_acceptance.htm">bankers acceptances</a>.</p> <table border="0" cellpadding="0" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="345" align="left" id="table8"> <tr> <td width="336"> <script type="text/javascript"></script> <script type="text/javascript" src="http://pagead2.googlesyndication.com/pagead/show_ads.js"> </script>  </td> <td width="9"> </td> </tr> </table> <p class="body">Debt obligations issued via a <a href="../articles/securitization.htm">securitizations</a> are called bonds irrespective of their anticipated term.</p> <p class="body">Bonds are issued in different ways. The US Department of Treasury periodically auctions <a href="../articles/treasury_securities.htm">Treasury securities</a> directly to investors. Most corporate and <a href="../articles/municipal_securities.htm">municipal bonds</a> are sold through investment banks in public offerings. Some bonds are also issued as <a href="../articles/private_placement.htm">private placements</a>.</p> <p class="body">There is an active secondary market for bonds, although not all bonds have the same <a href="../articles/liquidity.htm">liquidity</a>. Some trading takes place on exchanges. For example, a number of bonds are listed on the New York Stock Exchange. Most bonds trade <a href="../articles/exchange_traded.htm">over the counter</a> (OTC). Brokers or dealers trade bonds via phones or computer networks. Usually, if an investment bank handled the public offering of a bond, it will make a market in that bond. It serves as a dealer, always ready to quote firm bid or offer prices for that particular bond.</p> <table border="0" cellpadding="0" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="100%" id="table9"> <tr> <td height="30" valign="bottom" colspan="2"> <p class="header2_black">Related Internal Links</td> </tr> <tr> <td colspan="2" bgcolor="#CC9966" height="2"> <img border="0" src="../images/blank_2x2.gif" width="2" height="2"></td> </tr> <tr> <td bgcolor="#FFFFCC" colspan="2"> <table border="0" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="100%" cellpadding="6" id="table10"> <tr> <td width="100%"> <p class="explanatory_text"> <img border="0" src="../images/bullet_link_glossary.gif" width="26" height="15"><a href="../articles/agency_securities.htm">agency security</a> A security issued by a US federal agency or government sponsored enterprise.</p> <p class="explanatory_text"> <img border="0" src="../images/bullet_link_glossary.gif" width="26" height="15"><a href="../articles/bond_accrued_interest.htm">bond accrued interest</a> Interest that is earned but not yet paid on a bond.<p class="explanatory_text"> <img border="0" src="../images/bullet_link_glossary.gif" width="26" height="15"><a href="../articles/book_entry_registered_bearer_bonds.htm">book-entry, registered and bearer bonds</a> Three forms of bonds differing in how ownership is evidenced.<p class="explanatory_text"> <img border="0" src="../images/bullet_link_glossary.gif" width="26" height="15"><strong style="font-weight: 400"><a href="../articles/callable_bond.htm">callable bond</a> </strong>A bond which allows the issuer to repurchase the bond for a specified price on certain dates prior to the bond's maturity.<p align="left" class="explanatory_text"> <img border="0" src="../images/bullet_link_glossary.gif" width="26" height="15"><a href="../articles/common_stock.htm">common stock</a> Non-preferred stock.</p> <p class="explanatory_text"> <img border="0" src="../images/bullet_link_glossary.gif" width="26" height="15"><strong style="font-weight: 400"><a href="../articles/compounding.htm">compound interest</a> Any of several methods of crediting interest in which interest is earned on interest.</strong><p align="left" class="explanatory_text"> <img border="0" src="../images/bullet_link_glossary.gif" width="26" height="15"><strong style="font-weight: 400"><a href="../articles/corporate_bond.htm">corporate bond</a> A bond issued by a corporation.</strong></p> <p align="left" class="explanatory_text"> <img border="0" src="../images/bullet_link_glossary.gif" width="26" height="15"><strong style="font-weight: 400"><a href="../articles/credit_risk.htm">credit risk</a> Risk</strong> due to uncertainty in a counterparty's ability to meet its obligations.</p> <p class="explanatory_text"> <img border="0" src="../images/bullet_link_glossary.gif" width="26" height="15"><a href="../articles/duration_and_convexity.htm">duration and convexity</a> Risk metrics employed in fixed income markets.<p class="explanatory_text"> <img border="0" src="../images/bullet_link_glossary.gif" width="26" height="15"><a href="../articles/fixed_income_term_structure.htm">fixed income term structures</a> Overview article.</p> <p align="left" class="explanatory_text"> <img border="0" src="../images/bullet_link_glossary.gif" width="26" height="15"><a href="../articles/floater.htm">floater</a> A fixed income instrument whose coupon fluctuates with some designated reference rate.</p> <p class="explanatory_text"> <img border="0" src="../images/bullet_link_glossary.gif" width="26" height="15"><a href="../articles/hybrid.htm">hybrid instrument</a> A financial instrument that blend characteristics of debt and equity markets.</p> <p class="explanatory_text"> <img border="0" src="../images/bullet_link_glossary.gif" width="26" height="15"><a href="../articles/interest_rate_risk.htm">interest rate risk</a> Risk due to uncertain future interest rates.</p> <p class="explanatory_text"> <img border="0" src="../images/bullet_link_glossary.gif" width="26" height="15"><a href="../articles/interest_rate_spreads.htm">interest rate spreads</a> Discusses credit spreads, liquidity spreads, optionality spreads, etc. in the fixed income markets.<p class="explanatory_text"> <img border="0" src="../images/bullet_link_glossary.gif" width="26" height="15"><a href="../articles/interest_rate_swap.htm">interest rate swap</a> A swap under which both cash flow streams are in the same currency and are defined as cash flow streams that might be associated with some fixed income obligations. <p class="explanatory_text"> <img border="0" src="../images/bullet_link_glossary.gif" width="26" height="15"><a href="../articles/international_bonds.htm">international bond</a> Any bond issued or invested in across national boarders.<p align="left" 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class="explanatory_text"> <img border="0" src="../images/bullet_link_glossary.gif" width="26" height="15"><a href="../articles/zero_coupon_bond.htm">zero-coupon bond</a> A bond that pays no coupons, pays its par value at maturity and is issued at a discount.</td> </tr> </table> </td> </tr> <tr> <td height="30" valign="bottom" colspan="2"> <p class="header2_black">Related Books</td> </tr> <tr> <td colspan="2" bgcolor="#CC9966" height="2"> <img border="0" src="../images/blank_2x2.gif" width="2" height="2"></td> </tr> <tr> <td bgcolor="#FFFFCC" colspan="2"> <table border="0" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="100%" cellpadding="6" id="table11"> <tr> <td width="100%"> <p class="explanatory_text">Fabozzi (<a target="_blank" href="http://www.riskbook.com/link/fabozzi_frank_(2000).htm">2005</a>) is the standard reference on bonds.</p> <table border="0" cellpadding="4" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="100%" id="table12"> <tr> <td width="100" align="left" valign="top"> <map name="FPMap591"> <area target="_blank" href="http://www.riskbook.com/link/fabozzi_frank_(2000).htm" shape="rect" coords="0, 0, 83, 124"> </map> <img border="0" src="../images/book_fabozzi_f_(2000)_125.gif" usemap="#FPMap591" width="84" height="125"></td> <td align="left" valign="top"> <table border="0" cellpadding="1" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="100%" id="table13"> <tr> <td width="90%" colspan="3"> <p class="title"> <a target="_blank" href="http://www.riskbook.com/link/fabozzi_frank_(2000).htm"> Handbook of Fixed Income Securities</a></td> </tr> <tr> <td colspan="3"> <p class="author"><b>Frank J. 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