Which are the Generic Features of Bonds

Bonds are simply defined as long-term promissory notes from an issuer. Issuers tend to be large organizations, like the federal government and its agencies, and state and local governments. Bonds are contracts that state the interest payment (coupon rate) to be paid to the investor, the par value (principal or face value of the bond), and when the par value will be repaid to the investor. Overall, bonds provide the investor with security and a fixed income under a legal contract.

Bondholders want to minimize the business, market, and political risks of investing. From the date of issue, the bond’s rate of interest payments (the coupon rate) and maturity date don’t change. The price of the bond (the par or face value of the bond when it’s issued) can vary during the bond term, depending on changes in interest rates. Generally, if interest rates increase, the bond’s value falls. On the other hand, if interest rates decline, the value of the bond increases.

A different type of bond contract is a variable-rate note or floating-rate note. A few corporate bonds have floating rates. The coupon rate is fixed for a short period of time and then varies with a specific short-term rate (such as a Treasury bill). With floating-rate notes, the investor’s interest payments, rather than the price of the bond, go up and down.

Corporate and municipal bonds are usually purchased through a broker. Treasury securities (bills, notes, and bonds) can be purchased directly from the government, without a broker.

The most popular bonds are often long-term debt that matures in ten or more years. A bond is a commitment by a public or private entity to pay the bondholder certain interest payments at specific times and the principal (the original investment) at the end of a specified time period.

Bonds have clearly stated terms and maturity dates. These terms can be as short as 13 weeks or as long as 30 years. Sometimes you can’t recover your investment until the bond matures. If you have to sell the bond before it matures, you might have a difficult time finding a buyer. The broker’s commission takes some of your return, and you lose the sizable return you were going to receive on your original investment.