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Bond (finance)

Bond (finance)

This is an emissive debt security, the owner of which has the right to receive its face value in money or property within the period established by it from the person who issued it (the issuer).

Also, a bond may give the holder the right to receive a one-time or periodic income in the form of a percentage of its face value (including in the form of a coupon). Often there are bonds with a variable interest rate, which is tied to interbank market rates, the refinancing rate, or other financial indicators. Sometimes bonds provide for redemption not in cash, but in pre-agreed property or other rights.

Bonds can be classified according to any of their characteristics: issuer, maturity, type of income, convertibility, currency (including in relation to the issuer), issue purposes, investment attractiveness and rating.

Types of bonds
By issuer
  • Government bonds or Sovereign bonds - a security issued to cover the budget deficit on behalf of the government or local authorities, but necessarily guaranteed by the government.
  • Municipal bonds are bonds issued by city, local authorities in the form of a loan against municipal property in order to finance various projects. Typically, income from municipal bonds is exempt from state and local taxes.
  • Corporate bonds - issued by any company.
By type of income
  • A Zero Coupon Bond is a bond that yields a discount. Discount bonds are sold at a price below par. The closer the bond's maturity date, the higher the bond's market price.
  • Fixed Rate Bond or Fixed Income - a coupon bond, the income on which is paid on coupons with a fixed interest rate. Coupon information is indicated in the bond issue prospectus. Most Eurobonds belong to this type of bonds.
  • Floating Rate Note (FRN) or Floater is a coupon bond with a variable coupon payment, the amount of which is tied to certain macroeconomic benchmark indicators: government securities yields, interbank loan rates (LIBOR, EURIBOR, MOSPRIME), etc. Size coupon rates are regularly recalculated: usually monthly or every three months, and so on.
  • Amortized bond - for such a bond, in addition to coupon payments, the issuer periodically pays a part of the face value of the bond. Each payment reduces the face value of the bond until it reaches zero on the maturity date. The coupon size also gradually decreases in proportion to the face value.

Timeline

Further Resources

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References

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