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Table of Contents
[edit] Issuing bonds
[edit] Features of bonds
[edit] Types of bonds
	[edit] Bonds issued in foreign currencies
[edit] Trading and valuing bonds
[edit] Investing in bonds
	[edit] Bond indices
[edit] See also
Document Text Contents
Page 1

Bond (finance)
From Wikipedia, the free encyclopedia

In finance, a bond is a debt security, in which the authorized issuer owes the holders a debt
and, depending on the terms of the bond, is obliged to pay interest (the coupon) and/or to
repay the principal at a later date, termed maturity. It is a formal contract to repay borrowed
money with interest at fixed intervals.[1]

Thus a bond is like a loan: the issuer is the borrower, the bond holder is the lender, and the
coupon is the interest. Bonds provide the borrower with external funds to finance long-term
investments, or, in the case of government bonds, to finance current expenditure. Certificates
of deposit (CDs) or commercial paper are considered to be money market instruments and not

Bonds and stocks are both securities, but the major difference between the two is that stock-
holders are the owners of the company (i.e., they have an equity stake), whereas bond holders
are lenders to the issuers. Another difference is that bonds usually have a defined term, or
maturity, after which the bond is redeemed, whereas stocks may be outstanding indefinitely.
An exception is a consol bond, which is a perpetuity (i.e., bond with no maturity).


• 1 Issuing bonds
• 2 Features of bonds

• 3 Types of bonds

o 3.1 Bonds issued in foreign

• 4 Trading and valuing bonds

• 5 Investing in bonds

o 5.1 Bond indices

• 6 See also

• 7 References

• 8 External links

[edit] Issuing bonds

Bonds are issued by public authorities, credit institutions, companies and supranational
institutions in the primary markets. The most common process of issuing bonds is through
underwriting. In underwriting, one or more securities firms or banks, forming a syndicate, buy

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NB : This is the Case for T- and Euro-Bills

• Inflation linked bonds , in which the principal amount and the interest
payments are indexed to inflation. The interest rate is normally lower than
for fixed rate bonds with a comparable maturity (this position briefly
reversed itself for short-term UK bonds in December 2008). However, as
the principal amount grows, the payments increase with inflation. The
government of the United Kingdom was the first to issue inflation linked
Gilts in the 1980s. Treasury Inflation-Protected Securities (TIPS) and I-
bonds are examples of inflation linked bonds issued by the U.S.

• Other indexed bonds, for example equity-linked notes and bonds indexed
on a business indicator (income, added value) or on a country's GDP.

• Asset-backed securities are bonds whose interest and principal payments
are backed by underlying cash flows from other assets. Examples of asset-
backed securities are mortgage-backed securities (MBS's), collateralized
mortgage obligations (CMOs) and collateralized debt obligations (CDOs).

• Subordinated bonds are those that have a lower priority than other bonds
of the issuer in case of liquidation. In case of bankruptcy, there is a
hierarchy of creditors. First the liquidator is paid, then government taxes,
etc. The first bond holders in line to be paid are those holding what is
called senior bonds. After they have been paid, the subordinated bond
holders are paid. As a result, the risk is higher. Therefore, subordinated
bonds usually have a lower credit rating than senior bonds. The main
examples of subordinated bonds can be found in bonds issued by banks,
and asset-backed securities. The latter are often issued in tranches. The
senior tranches get paid back first, the subordinated tranches later.

• Perpetual bonds are also often called perpetuities. They have no maturity
date. The most famous of these are the UK Consols, which are also known
as Treasury Annuities or Undated Treasuries. Some of these were issued
back in 1888 and still trade today, although the amounts are now
insignificant. Some ultra long-term bonds (sometimes a bond can last
centuries: West Shore Railroad issued a bond which matures in 2361 (i.e.
24th century)) are virtually perpetuities from a financial point of view, with
the current value of principal near zero.

• Bearer bond is an official certificate issued without a named holder. In
other words, the person who has the paper certificate can claim the value
of the bond. Often they are registered by a number to prevent
counterfeiting, but may be traded like cash. Bearer bonds are very risky
because they can be lost or stolen. Especially after federal income tax
began in the United States, bearer bonds were seen as an opportunity to
conceal income or assets.[2] U.S. corporations stopped issuing bearer bonds
in the 1960s, the U.S. Treasury stopped in 1982, and state and local tax-
exempt bearer bonds were prohibited in 1983.[3]

• Registered bond is a bond whose ownership (and any subsequent
purchaser) is recorded by the issuer, or by a transfer agent. It is the

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alternative to a Bearer bond. Interest payments, and the principal upon
maturity, are sent to the registered owner.

• Municipal bond is a bond issued by a state, U.S. Territory, city, local
government, or their agencies. Interest income received by holders of
municipal bonds is often exempt from the federal income tax and from the
income tax of the state in which they are issued, although municipal bonds
issued for certain purposes may not be tax exempt.

• Book-entry bond is a bond that does not have a paper certificate. As
physically processing paper bonds and interest coupons became more
expensive, issuers (and banks that used to collect coupon interest for
depositors) have tried to discourage their use. Some book-entry bond
issues do not offer the option of a paper certificate, even to investors who
prefer them.[4]

• Lottery bond is a bond issued by a state, usually a European state. Interest
is paid like a traditional fixed rate bond, but the issuer will redeem
randomly selected individual bonds within the issue according to a
schedule. Some of these redemptions will be for a higher value than the
face value of the bond.

• War bond is a bond issued by a country to fund a war.

• Serial bond is a bond that matures in installments over a period of time. In
effect, a $100,000, 5-year serial bond would mature in a $20,000 annuity
over a 5-year interval.

• Revenue bond is a special type of municipal bond distinguished by its
guarantee of repayment solely from revenues generated by a specified
revenue-generating entity associated with the purpose of the bonds.
Revenue bonds are typically "non-recourse," meaning that in the event of
default, the bond holder has no recourse to other governmental assets or

[edit] Bonds issued in foreign currencies

Some companies, banks, governments, and other sovereign entities may decide to issue bonds
in foreign currencies as it may appear to be more stable and predictable than their domestic
currency. Issuing bonds denominated in foreign currencies also gives issuers the ability to
access investment capital available in foreign markets. The proceeds from the issuance of
these bonds can be used by companies to break into foreign markets, or can be converted into
the issuing company's local currency to be used on existing operations. Foreign issuer bonds
can also be used to hedge foreign exchange rate risk. Some of these bonds are called by their
nicknames, such as the "samurai bond."

• Eurodollar bond, a U.S. dollar-denominated bond issued by a non-U.S.
entity outside the U.S[5]

• Kangaroo bond , an Australian dollar-denominated bond issued by a non-
Australian entity in the Australian market

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company Worldcom, in 2004 its bondholders ended up being paid 35.7 cents on the dollar. In
a bankruptcy involving reorganization or recapitalization, as opposed to liquidation,
bondholders may end up having the value of their bonds reduced, often through an exchange
for a smaller number of newly issued bonds.

• Some bonds are callable, meaning that even though the company has
agreed to make payments plus interest towards the debt for a certain
period of time, the company can choose to pay off the bond early. This
creates reinvestment risk, meaning the investor is forced to find a new
place for his money, and the investor might not be able to find as good a
deal, especially because this usually happens when interest rates are

[edit] Bond indices

See also: Bond market index

A number of bond indices exist for the purposes of managing portfolios and measuring
performance, similar to the S&P 500 or Russell Indexes for stocks. The most common
American benchmarks are the (ex) Lehman Aggregate, Citigroup BIG and Merrill Lynch
Domestic Master. Most indices are parts of families of broader indices that can be used to
measure global bond portfolios, or may be further subdivided by maturity and/or sector for
managing specialized portfolios.

[edit] See also
• Bond market
• Bond fund

• Bond market index

• Brady Bonds

• Eurobond

• Bond credit rating

• Collective action clause

• Criticism of debt

• Debenture

• Deferred financing costs

• Fixed income

• Immunization (finance)

• List of accounting topics

• List of economics topics

• List of finance topics

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