In the field of finance, bonds are debt instruments from bond issuers to holders. The most common types of bonds include local bonds and corporate bonds.
Bonds are debt security, in which the issuer pays the debt to the holder and (depending on the terms of the bonds) is obliged to pay interest (coupon) or repay the principal on a later date, called the due date. Interest is usually paid at fixed intervals (semester, yearly, sometimes monthly). Often bonds can be negotiated, that is, ownership of instruments can be transferred in the secondary market. This means that once the transfer agent is in the medal of the bonds bank, it is very liquid in the secondary market.
So a bond is a form of loan or IOU: bond holder is a lender (creditor), issuer issuer of a bond is a borrower, and a coupon is interest. Bonds provide borrowers with external funds to finance long-term investments, or, in the case of government bonds, to finance current expenditures. Certificates of short term (CD) or short-term commercial paper are considered as money market instruments and not bonds: the main difference is the length of the instrument period.
Bonds and stocks are securities, but the main difference between the two is that shareholders have equity shares in the firm (that is, they are owners), whereas bondholders have creditors at stake in the company (ie, they are lenders). Being a creditor, bondholders have priority over shareholders. This means they will be paid back before the shareholders, but will rank behind the secured creditors, in the event of bankruptcy. Another difference is that bonds usually have a defined term, or maturity, after a bond is redeemed, while stocks usually remain unlimited. Exceptions are unbreakable bonds, such as consoles, which are lasting, ie bonds without maturity.
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Etimologi
In English, the word "bond" is related to the etymology of "bond". In the sense of "one binding instrument to pay an amount to another", the use of the word "bond" comes from at least the 1590s.
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Publishing
Bonds are issued by public authorities, credit institutions, corporations and supranational institutions in the primary market. The most common process for issuing bonds is through underwriting. When a bond issue is borne, one or more securities firms or banks, forming a syndicate, buy the entire bond issue from the issuer and resell it to the investor. Security firms take risks of not being able to sell on this issue to terminate investors. Primary publishing is governed by bookrunners that governs bond issues, has direct contact with investors and acts as an advisor to bond issuers in terms of time and price of bond issuance. The first listed bookrunner among all the underwriters who participated in publishing on the advertising tombstones were commonly used to announce the bonds to the public. The willingness of bookrunners to bear should be discussed before any decision on the bond issuance requirements as there may be limited demand for bonds.
In contrast, government bonds are usually issued in auctions. In some cases, both community members and banks may bid for bonds. In other cases, only the market maker can bid for the bonds. The overall rate of return on a bond depends on the terms of the bond and the price paid. Bond requirements, such as coupons, are set first and the price is determined by the market.
In the case of a secured bond, the underwriter will charge for the guarantee. An alternative process for issuing bonds, which is usually used for smaller issues and avoids these costs, is a private placement bond. Bonds sold directly to the buyer can not be traded on the bond market.
Historically the alternative publishing practice is to borrow government authorities to issue bonds over a period of time, usually at a fixed price, with volume sold on a given day depending on market conditions. This is called tap issue or bond tap .
Features
Headmaster
Nominal, principal, nominal, or nominal amount is the amount at which the issuer pays interest, and which, most commonly, shall be paid at the end of the semester. Some structured bonds can have different amounts of exchange than the nominal amount and can be attributed to the performance of a particular asset.
Maturity
The issuer must repay the nominal amount on the due date. As long as all past due payments have been made, the issuer has no further obligations to the bondholders after the due date. The length of time to the due date is often referred to as the term or period or maturity of a bond. Maturity can be over time, although debt securities with a term of less than a year are generally a money market instrument rather than a bond. Most bonds have a term of up to 30 years. Some bonds have been issued for a period of 50 years or more, and historically there are some problems without due dates (can not be redeemed). In the market for US Treasury securities, there are three categories of bond maturity:
- short-term (bills): maturities of one to five years;
- medium term (note): due between six and twelve years;
- long term (bonds): over twelve years.
Coupon
The coupon is the interest rate the issuer pays to the holder. Usually this rate is set throughout the term of the bond. These can also vary with money market indices, such as LIBOR, or even more exotic. The name "coupon" came about because in the past, a certificate issued paper bonds that had coupons attached to them, one for each interest payment. On the due date the bondholder will submit a coupon to the bank in exchange for interest payments. Interest can be paid on different frequencies: generally semi-annual, ie every 6 months, or every year.
Yield
The result is the rate of return received from the investment in bonds. Usually refers to
- Current results, or current results, are only annual interest payments divided by the current market price of the bonds (often the net price).
- Rewards to maturity, or redemption, which is a more useful measure of bond returns. This takes into account the current market price, as well as the amount and timing of all remaining coupon payments and repayments at maturity. This is equivalent to the internal rate of return of bonds.
Credit quality
The quality of the problem refers to the probability that the bondholder will receive the amount promised on the due date. It will depend on various factors. High yield bonds are bonds that are rated below investment grade by credit rating agencies. Because these bonds are riskier than investment grade bonds, investors expect to get higher yields. These bonds are also called junk bonds .
Market price
The market price of the tradable bonds will be affected, among other factors, by the amount, currency and timing of interest payments and the repayment of capital, the quality of the bonds, and the redemption proceeds available from other tradable bonds. in the market.
Price can be quoted as clean or dirty. "Gross" includes the present value of all future cash flows, including accrued interest, and most often used in Europe. "Net" excludes accrued interest, and is most often used in the US.
The price of a problem in which investors buy bonds when they are first published is usually roughly equal to the nominal amount. The net proceeds received by the issuer are the issue price, less the cost of issuance. The bond market price will vary throughout its life: it can be traded at a premium (above par, usually because the market rate has dropped since published), or at a discount (price below par, if the market price has gone up or there is a high default probability on the bond ).
More
- Indentures and Covenants - Indenture is a formal debt agreement that establishes the terms of the bond issue, whereas the agreement is a clause of such agreement. The Agreement determines the rights of bondholders and obligations of issuers, such as those that must be performed or prohibited by the company. In the US, federal and state securities and commercial laws apply to enforcement of this agreement, interpreted by courts as contracts between issuers and bondholders. These provisions can be changed only with great difficulty when bonds are circulated, with amendments to the governing documents generally requiring approval by a majority (or super-majority) vote of the bondholder.
- Optional: Sometimes a bond can contain embedded options; that is, it provides features such as options to the holder or publisher:
- Call Capability - Some bonds give the issuer the right to repay the bond before the due date on the date of the call; see call options. These bonds are referred to as callable bonds. Most of the callable bonds allow the issuer to return the bonds at par. With multiple bonds, the issuer has to pay a premium, called premium call. This is especially true for high yield bonds. It has a very strict agreement, limiting the issuer in its operation. To be free of this agreement, the issuer can repay the bonds early, but only at high cost.
- Putability - Some bonds give the right holder to force the issuer to return the bond before the due date on the put date; see put option. This is called a bond that can be withdrawn or withdrawn.
- Date of call and date of pastor - date on which a recognizable and delayed bond can be redeemed early. There are four main categories:
- A Bermudan can be called to have multiple call dates, usually coinciding with the date of the coupon.
- The European call has only one call date. This is a special case of a Bermudan who can be summoned.
- The American call can be called at any time until the due date.
- Dead placement is an optional redemption feature on a debt instrument that enables the beneficiary of the deceased bondholder to return the bond to the issuer at face value in the event of the death of the holder of the bond or the inability of the law. This is also known as the "safe option".
- Provision of sinking funds from corporate bonds requires a certain part of the problem for retirement on a regular basis. All bond issues can be liquidated on the due date; otherwise, the rest is called the maturity of the balloon. Issuers may pay to the trustee, who in turn calls the randomly selected bonds on this issue, or, alternatively, buys bonds on the open market, then returns them to the trustee.
- Bonds are often identified by their international securities identification number, or ISIN, which is a 12-digit alphanumeric code that uniquely identifies debt securities.
- A smart bond is an automated programmable bond contract that uses the capability of a blockchain database to operate as a cryptographically safe, open, and transparent public handbook. This is one class of financial instruments known as smart contracts, "computerized transaction protocols that enforce contract terms." Smart bond technology can lower transaction costs by eliminating "middle or back office", as well as bond registration, which substantially reduces the cost of bond services. Other potential benefits are the potential for immediate, non-day resolutions, and lower operational risks. By 2015, UBS is experimenting with smart bonds that use blockchain bitcoin.
Type
Some companies, banks, governments, and other sovereign bodies may decide to issue bonds in foreign currency because they may appear more stable and predictable than their domestic currency. The issuance of bonds in foreign currency also gives issuers the ability to access available capital investment in overseas markets. The proceeds from the issuance of these bonds may be used by the company to enter the overseas market, or may be converted into the issuer's local currency for use on existing operations through the use of foreign exchange hedging. Overseas issuer bonds can also be used to protect foreign exchange rates. Some foreign issuing bonds are called by their nicknames, such as "samurai bond". This can be issued by foreign issuers who want to diversify their investor base from the domestic market. These bond issues are generally governed by the laws of the publishing market, for example, samurai bonds, issued by investors based in Europe, will be governed by Japanese law. Not all of the following bonds are limited to be bought by investors in the publishing market.
- Eurodollar Bonds, US dollar denominated bonds issued by entities outside the US.
- Baklava bond, bonds in Turkish Lira denomination and issued by domestic or foreign entities in Turkish market
- Yankee bonds, US dollar denominated bonds issued by non-US entities in the US market
- Kangaroo Bonds, Australian dollar denominated bonds issued by non-Australian entities in the Australian market
- Maple bonds, Canadian dollar denominated bonds issued by non-Canadian entities in the Canadian market
- Indian bond bonds rupee issued outside India.
- Samurai bonds, Japanese yen denominated bonds issued by non-Japanese entities in the Japanese market
- Uridashi Bonds, non-yen bonds sold to Japanese retail investors.
- Shibosai Bond, private placement bonds in the Japanese market with limited distribution to institutions and banks.
- Shogun bonds, non-yen bonds issued in Japan by non-Japanese or government agencies
- Bulldog Bonds, pound sterling-denominated bonds issued in London by foreign agencies or governments.
- The Matryoshka bond, a Russian ruble denominated bond issued in the Russian Federation by a non-Russian entity. The name is derived from the famous Russian wooden doll, Matrioshka, which is popular among foreign visitors to Russia
- Arirang Bonds, Korean won-denominated bonds issued by non-Korean entities in Korean markets
- Kimchi bonds, non-Korean won-denominated bonds issued by non-Korean entities in Korean markets
- Formosa Bonds, New Taiwan Dollar-denominated bonds issued by non-Taiwan entities in the Taiwan market
- Panda bond, China renminbi bond issued by a non-Chinese entity in the market of the People's Republic of China
- Dim sum bonds, Chinese renminbi bonds issued by Chinese entities in Hong Kong. Allows foreign investors to be prohibited from investing in Chinese corporate debt in mainland China to invest and be exposed to the Chinese currency in Hong Kong.
- Huaso bond, Chilean peso-denomination bond issued by a non-Chilean entity in the Chilean market.
- Foreign currency denominated Lion City bonds issued by foreign companies in Singapore
- Komodo dragons, global rupiah-denominated bonds published in Indonesia, "Komodo is a large lizard species found in eastern Indonesia."
Bond ratings
At the time of bond issuance, the interest rate and other conditions of the bond will be affected by various factors, such as the current market interest rate, the term and credit worthiness of the issuer.
These factors tend to change over time, so the bond market price will vary after being issued. The market price is expressed as a percentage of the face value. Bonds are not necessarily issued at face value (100% of face value, corresponding to price 100), but bond prices move toward par as it approaches maturity (if the market expects full and timely due payments) as this is the price will be paid by the issuer to redeem the bond. This is called "Pull to Par". At other times, the price can be above par (bond price of more than 100), so-called trading at a premium, or below par (bond price less than 100), called trade at a discount. Most government bonds are denominated in $ 1000 in the United States, or in Ã, Â £ 100 units in the UK. Therefore, US bonds are big discounts, selling at a price of 75.26, showing a sale price of $ 752.60 per bond sold. (Often, in the US, bond prices are quoted in points and thirty seconds from a point, not in decimal form.) Some short-term bonds, such as US Treasury bills, are always issued at a discount, and pay the nominal amount at maturity rather than paying coupon. These are called discounted bonds.
The bond market price is the present value of all expected future interest and the principal payment is discounted on the bond's yield to maturity, or the rate of return. The relationship is the definition of the redemption proceeds, which is likely to be close to the current market rate for other bonds with similar characteristics. (Otherwise, there will be an arbitrage opportunity.) The yields and prices of the related bonds are reversed so that when the market interest rates rise, the price of the bond falls and vice versa.
Bond market prices may be quoted including accrued interest since the last coupon date. (Some bond markets include accrued interest in trading prices and others add it separately when settlement is made.) Rates include accrued interest known as "full" or "gross price". ( See also Accrual Bonds.) Price excludes accrued interest known as "flat" or "net price".
The interest payment ("coupon payment") divided by the current price of the bond is called the current result (this is the nominal result multiplied by the nominal value and divided by the price). There are other existing results sizes like results for first call, result to worst, result to first par call, result to enter, cash flow and yield to maturity.
The relationship between yield and time to maturity (or alternatively between yield and weighted average terms that allow for interest and capital payments) to identical bonds is called the yield curve. The yield curve is the graph that plots this relationship.
Bond markets, unlike stock or stock markets, sometimes do not have centralized trading or trading systems. In contrast, in the most advanced bond markets such as the US, Japan and Western Europe, bond trading in a decentralized and dealer-based over-the-counter market. In such markets, market liquidity is provided by dealers and other market participants who risk capital for trading activities. In the bond market, when an investor buys or sells a bond, the opposing party is almost always a bank or securities company that acts as a dealer. In some cases, when a dealer buys a bond from an investor, the dealer carries the "in inventory" bond, ie saving it for their own account. Dealers are then exposed to risk of price fluctuations. In other cases, the dealer immediately resells the bond to another investor.
The bond market can also be different from the stock market in that case, in some markets, investors sometimes do not pay broker commissions to dealers with whom they buy or sell bonds. Instead, the dealer earns revenue by means of spread, or difference, between the price at which the dealer buys a bond from one investor - the "offer" price - and the price at which he sells the same bond to another investor - the "ask" or "offer" price. Bid/bid spreads represent the total transaction costs associated with the transfer of bonds from one investor to another.
Invest in bonds
Bonds are bought and traded mostly by institutions such as central banks, state wealth funds, pension funds, insurance companies, hedge funds, and banks. Insurance companies and pension funds have liabilities that basically include a fixed amount paid on a predetermined date. They buy bonds to match their obligations, and can be compelled by law to do this. Most individuals who want to own bonds do so through bond funds. However, in the US, almost 10% of all outstanding bonds are held directly by households.
Bond volatility (especially short and medium-term bonds) is lower than equities (shares). Thus, bonds are generally viewed as safer investments than shares, but these perceptions are only partially true. Bonds experience lower day-to-day volatility than stocks, and bond interest payments are sometimes higher than general dividend payout rates. Bonds are often liquid - it is often quite easy for an institution to sell large amounts of bonds without affecting the price of many, which may be more difficult for equities - and the comparative certainty of fixed interest payments twice a year and fixed bumps the amount at maturity is attractive. Bondholders also enjoy the size of legal protection: under the laws of most countries, if a company goes bankrupt, bondholders will often receive a sum of money back (the amount of recovery), while equity shares often end up without value. However, bonds can also be risky but less risky than shares:
- Fixed rate bonds are subject to interest rate risk , which means that their market price will fall in value when the prevailing interest rate rises. Since the payment is set, the fall in the bond market price means an increase in the yield. As market interest rates rise, bond market prices will fall, reflecting the ability of investors to get higher interest rates on their money elsewhere - perhaps by buying newly issued bonds that already have higher interest rates. This does not affect interest payments to bondholders, so long-term investors who want a certain amount on the due date need not worry about price changes in their bonds and do not suffer from interest rate risk.
Bonds are also subject to other risks such as call and prepay risk, credit risk, reinvestment risk, liquidity risk, event risk, exchange rate risk, volatility risk, inflation risk, country risk and yield curve risk. Again, some of these will only affect a particular investor class.
Price changes in bonds will soon affect mutual funds holding this bond. If the value of bonds in their trading portfolio falls, the value of the portfolio also falls. This can be detrimental to professional investors such as banks, insurance companies, pension funds, and asset managers (regardless of whether the value is immediately "marked to market" or not). If there is a possibility that individual bondholders may need to sell bonds and "cash out", interest rate risk could be a real issue (on the contrary, bond market prices will increase if interest rates fall, since 2001 to 2003. the interest rate on the bond is in terms of its duration.The effort to control this risk is called immunization or hedging.
- Bond prices may vary depending on the credit rating of the issuer - for example if credit rating agencies such as Standard & amp; Upgrading Poor and Moody or downgrading credit ratings from publishers. An unexpected drop in ratings will cause bond market prices to fall. As with interest rate risk, this risk does not affect the payment of bond interest (provided the issuer does not actually default), but puts it at risk of market price, which affects mutual funds holding this bond, and individual bondholders who may have to sell them.
- Corporate bondholders can lose a lot or all of their money if the company goes bankrupt. Under the laws of many countries (including the United States and Canada), bondholders are in line to receive proceeds from the sale of company assets that are liquidated in front of several other creditors. Bank lenders, holders of deposits (in the case of deposit institutions such as banks) and trade creditors may take precedence.
There is no guarantee how much money will be left to pay the bondholders. For example, after the accounting scandal and Chapter 11 bankruptcy at the giant telecommunications company Worldcom, in 2004 its bondholders eventually paid 35.7 cents. In bankruptcies involving reorganization or recapitalization, as opposed to liquidation, bondholders can end up with the value of their bonds diminishing, often through exchange for a small amount of newly issued bonds.
- Some bonds may be called, which means that although the company has agreed to make payments plus interest on the debt for a certain period of time, the company may choose to repay the bonds early. This creates a risk of reinvestment, which means investors are forced to find new places for their money, and investors may not be able to find a good deal, especially since this usually happens when interest rates fall.
Bond index
A number of bond indices exist for the purpose of managing the portfolio and measuring performance, similar to the S & amp; P 500 or Russell for stock. The most common American benchmarks are Barclays Capital Aggregate (ex Lehman Aggregate), Citigroup BIG and Merrill Lynch Domestic Master. Most of the indexes are part of the family of the broader index that can be used to measure the portfolio of global bonds, or can be further divided by maturity or sector to manage a special portfolio.
See also
References
External links
- The bond link in Curlie (based on DMOZ)
- Estate planners who are victims of serious illness, FBI
Source of the article : Wikipedia
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