Bond Features By Investopedia
SHARE
Chapter 1 - 5
Chapter 6 - 10
Chapter 11 - 15
Chapter 16 - 17
11. Corporate Finance
14.2 Bond Features
12. Securities Markets
14.3 Basic Coupon Structures
13. Equity Investments
14.4 Early Retirement
14. Fixed Income Investments
14.5 Provisions for Redeeming Bonds
15. Derivatives
14.6 Refunding 14.7 The Importance of Embedded Options
Purpose of a Bond Indenture A bond indenture is the contract between a bondholder and the issuer. It is a legal document that states what the issuer can and cannot do, and states the bondholders rights. Since there tends to be a ton of legalese involved, the contract is managed by the corporate trustee who polices the actions of the issuer to ensure the rights of the bondholder are upheld. Within the indenture, there are affirmative and negative covenants: 1. Affirmative Covenants Affirmative covenants are what the issuer promises to do for the investor. These promises include things such as paying interest and principle in a timely manner; paying taxes and other expenses when due; maintaining the assets backing the bond and issuing reports to the trustee to ensure compliance. 2. Negative Covenants Negative convents are the restraints put on a borrower. These restraintsinclude issuing additional securities or taking on additional debt that may harm the current bondholders. This is generally done without meeting certaintests and/or ratios or receiving permission from the current bondholders.
Frequently Asked Questions What is the difference between a Traditional and a Roth IRA? How does margin trading in the forex market work? What Is The Formula For Calculating Weighted Average Cost Of Capital (WACC)? How Are Book Value and Intrinsic Value Different?
Basic Features of Bonds In order to better understand more complicated topics, the CFA Institute requires CFA candidates to have the ability to describe the basic features of a bond. These features include: 1. Maturity Maturity is the time at which the bond matures and the holder receives the final payment of principal and interest. The "term to maturity" is the amount of time until the bond actually matures. There are 3 basic classes of maturity: A. Short-Term Maturity - One to five years in length B.Intermediate-Term Maturity - Five to twelve years in length C. Long-Term Maturity - Twelve years or more in length Maturity is important because: It indicates the length of time in which an investor will receive interest as well as when he or she will receive principal payments. It affects the yield on the bond; longer maturities tend to yield higher rates. The price volatility of a bond is a function of its maturity. A longer maturity typically indicates higher volatility or, in Wall Street lingo, simply the "vol".
Trading Center
2. Par Value Par value is the dollar amount the holder will receive at the bond's maturity. It can be any amount but is typically $1,000 per bond. Par value is also known as principle, face, maturity or redemption value. Bond prices are quoted as a percentage of par. Example: Premiums and Discounts Imagine that par for ABC Corp. is $1000, which would =100. If the ABC Corp. bonds trade at 85 what would the dollar value of the bond be? What if ABC Corp. bonds at 102? Answer: At 85, the ABC Corp. bonds would trade at a discount to par at $850. If ABC Corp. bonds at 102, the bonds would trade at a premium of $1,020. 3. Coupon Rate A coupon rate states the interest rate the bond will pay the holders each year. To find the coupon's dollar value, simply multiply the coupon rate by the par value. The rate is for one year and payments are usually made on a semi-annual basis. Some asset-backed securities pay monthly, while many international securities pay only annually. The coupon rate also affects a bond's price. Typically, the higher the rate, the less price sensitivity for the bond price because of interest rate movements.
Partner Links Open an account at E*TRADE today. Open an IRA in 15 minutes. 15 minutes is a short time for long term planning. Roll over your old 401k. TD Ameritrade rollover consultants are here to make it easy.
4. Currency Denomination Currency denomination indicates what currency the interest and principle will be paid in. There are two main types: Dollar Denominated - refers to bonds with payment in USD. Nondollar-Denominated - denotes bonds in which the payments are in another currency besides USD. Other currency denomination structures can use various types of currencies to make payments. Because the provisions for redeeming bonds and options that are granted to the issuer or investor are more complicated topics, we will discuss them later in this LOS section. Example: Bond Table Let's take a look at an example of a bond with the features we've discussed so far, within a bond table format you'd see in a paper. ABC Corp 7.00% 6/1/10 at 90. The issuer is ABC Corp. The maturity is 2010 with a term to maturity of roughly 5 years. Par value is 1,000 per bond or 100 Coupon rate is 7%. Coupon Payment is $70 per year (coupon=coupon rate* par value = .07 *$1,000 = $70 Trading Price in dollars in $900.00 (par price * .90) ABC Corp is a U.S. company and all payments of interest ant principle are inUSD.
Learn to Master Microsoft Excel Learn the Excel skills you need to succeed in finance from the most trusted name in financial education. Investopedia Academy's Excel for Finance allows you to master formatting, Learn to Master Microsoft Excel formulas, data analysis, and financial modeling one Excel course at a time. Watch free trailer >>
Next: Basic Coupon Structures
Compare Popular Online Brokers Provider
Name
Description
Ally Invest
TD Ameritrade
blooom
Ally Invest
TD Ameritrade
blooom
Automated Investing & Expert Support at Ally Invest® > Learn More
Account Minimum: $0 Fee/Trade: $6.95
Get your 401k professionally invested while you sit back and relax with this roboadvisor. > Learn More
Get up to $600 when you open and fund an… > Learn More account.
Advertiser Disclosure
RELATED ARTICLES INVESTING
Simple Math for Fixed-Coupon Corporate Bonds A guide to help to understand the simple math behind fixed-coupon corporate bonds.
INVESTING
Understanding Bond Prices and Yields Understanding this relationship can help an investor in any market.
INVESTING
Top 6 Uses For Bonds We break down the stodgy stereotype to see what these investments can do for you.
INVESTING
4 Basic Things to Know About Bonds Learn the basic lingo of bonds to unveil familiar market dynamics and open to the door to becoming a competent bond investor.
INVESTING
How To Choose The Right Bond For You Bond investing is a stable and low-risk way to diversify a portfolio. However, knowing which types of bonds are right for you is not always easy.
Search Investopedia
DICTIONARY: # A B C D E F G H I J K L M N O P Q R S T U V W X Y Z
CONTENT LIBRARY Articles
Terms
Stock Analysis
Videos
CONNECT WITH INVESTOPEDIA Guides
Stock Simulator
Slideshows
FAQs
Exam Prep Quizzer
Calculators
Net Worth Calculator
Chart Advisor Browse Stocks
Mortgage Calculator
WORK WITH INVESTOPEDIA About Us
Advertise With Us
Contact Us
GET FREE NEWSLETTERS Careers
© 2018, Investopedia, LLC. All Rights Reserved Terms Of Use Privacy Policy
Newsletters