Bonds and stocks exist on a vastly different plane. Stocks represent the share capital contributed by people for running a business enterprise and the stock value is secured by the landed assets, goods and profits of the company. Bonds on the other hand are effectively loans (debts) raised by the government (treasury bonds) and companies (corporate bonds) from the public with the assurance of paying them back within a specified period at a specific interest rate.
Bonds are debt instruments unlike stocks
When you avail a home loan the mortgage on the home is the security for the loan, and in the same way in a bond the revenue receipts of the US treasury are the underlying assets in case of treasury bonds, and for corporate bonds the underlying security is the company’s assets and profits.
The jargon surrounding the bond can be easily understood:
- The face value or the principal amount indicates the amount that was borrowed by the company. This is the sum that has to be returned to you on maturity of the bond.
- Term or the time period of the bond: This is a measure of the time taken from the date of issue of the bond to its date of maturity. Bonds could be issued for different periods ranging from two to thirty years.
- Maturity date of the bond: This the date when the period or term of the bond expires. On the maturity date the bond issuing company is obligated to repay to the public the principal amount along with interest due on the bond.
- Coupons or interest payments on the bond: Normally interest is paid half yearly on long term bonds exceeding two year duration. For many others the interest accumulates and is paid on maturity.
- Coupon dates: These are the specific dates occurring at monthly or half yearly intervals when the interest payments are made.
- Present value of a bond: Naturally, you would like to know how much a bond is worth when you trade it mid-way before its maturity. The bond price is calculated by summing up all the interest that is remaining to be paid and adding this to the principal sum and discounting that amount in a precise mathematical formula to arrive at the bond’s present value or PV. This will be the value that you pay to purchase a bond listed on an exchange.
The reasons why bonds are issued
The federal government does it to fund government expenditure that has ballooned above income, the municipal authorities use it for raising funds for financing big town development projects, and companies use the money raised through bonds to expand operations and grow their business.
How we go about buying bonds
For individuals the math associated with researching and calculation of the strengths and values of bonds can be exhausting, and trading in individual bonds can assume complex dimensions. One way out is a bond fund. This is a type of mutual fund where the money canvassed from investors is invested in a selection of high ranking bonds. Here the experts have already done the research for you and maneuver the fund money in and out of various bonds, while assuring you of a steady return. So all you have to do is buy shares in such bond funds and watch your money grow steadily.
Suffering a financial crunch situation?
If paucity of cash is coming in the way of a good investment you can take a one shot cash loan for title. The loan for vehicle title can get you cash totaling 60% of the aggregate resale value of your vehicle at very short notice and with the bare minimum formalities. The installment loan in California comes bundled with a lower interest rate of 25% APR that takes the pressure off repayment. The car equity loan repayment can be extended or accelerated as you desire keeping in view your repaying ability. The auto collateral loan uses the car title or your pink slip as collateral. The money will come in handy in fueling your investment opportunities.