The Name is Bonds, Corporate Bonds

The stock market may be very intimidating for some people For
most people the money market revolves around just a few things
such as cash, checks, and credit cards But what about the many
other instruments you read about in the business section of the
newspaper – instruments such as bonds, stock, and options?
It may take some time to get used to these terms so it’s best to
tackle them one by one For now, let us focus on bonds
Bonds are certificates sold by corporations and governments to
raise money for their capital Those who purchase these bonds
are essentially loaning money to the bond’s issuer in return for
interest The investor can hold the bond and collect interest
payments or sell the bond to a third party
The first bonds were issued by the Dutch East India Company in
1623
Bonds are usually held by the buyer longer than a set minimum
period This period is called a maturity period The buyer must
hold the bond for this period to earn the interest for that bond
Bonds and stocks are both securities, but the difference is that
stock holders own a part of the issuing company (part ownership
of a company due to ownership of stocks is called equity),
whereas bond holders are in essence lenders to the issuer
A bond’s principal, or face value, represents the amount of the
original loan that is to be repaid on the bond’s maturity date
The interest that the issuer agrees to pay each year is known as
the coupon This term comes from the fact that during the olden
times people would attach coupons that could be redeemed as
interest payments at the bottom of bond certificates
There are many kinds of bonds: zero-coupon, floating-rate,
callable, putable, and convertible
Zero Coupon Bonds These bonds do not make periodic interest
payments The buyer only makes a profit by buying the bond below
its principal, or face value
Floating Rate Bonds The coupon rate or interest rate for this
kind of bond varies according to an established formula The
maturity date for this kind of bond can also be changed
according to pre-set agreements
Callable and Putable Bonds The Callable type of bond allows the
issuer to pay off the interest prior to the maturity date, while
the Putable bond allows the buyer to force the issuer to pay the
interest before its maturity date
Convertible Bond This bond allows the bondholder to exchange the
bond for shares in the issuer’s common stock at a specified date
Bond issuers can sell bonds through an auction process or
through investment banking services The investment banker can
then buy the bonds from the issuer and sell them to the public
Stocks offer a higher potential return if share prices rise
Bonds, however, are generally a safer investment Stock
dividends depend on company profits Bond interest payments, on
the other hand, are made even if the company is losing money If
a corporation goes bankrupt, bondholders are paid before
stockholders
Investing in bonds, though, has its risks, too Because most
bonds offer fixed rate interest, a bond with a low interest rate
will be less valuable if interest rates rise to the point that
the investor’s money could be better off invested elsewhere If
the inflation rate rises in relation to the coupon rate, the
value of the investor’s return will be reduced
Bonds are said to be safer that shares due to the fact that
their interest rate and face value are stable Prices for shares
may fluctuate wildly leading some cautious investors to invest
in bonds instead

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