A bond is a fixed income investment when money is lent to a corporate or governmental entity and paid back in a set amount over a period of time. Lots of different kinds of companies use bonds, including companies, municipalities, states and governments – basically anyone who needs to raise money to finance a project, maintain an existing project or refinance a debt they already have.
Bonds work alongside stock options and cash as one of the three main classes of assets a company can have.
The person issuing the bond clearly defines the terms at the very beginning, including the interest rate and the maturity date, or the time when the bond has to be paid off in full.
The actual market price of a bond depends on the credit of the issuer, the length of time until the maturity date, and the rate as it compares to the interest rate environment at the time that it’s issued.
There are three main types of bonds: corporate, municipal and treasuries. Corporate bonds are issued by companies. That’s probably a huge DUH but hey, this is a dictionary. We’re just trying to do our jobs. Municipal bonds are issued by states and – you guessed it – municipalities. Treasuries are issued by the US Treasury and are broken into categories of bonds, notes and bills with different maturity dates for each one.
Most bonds have a lot of stuff in common and some key terms you should know when talking about one.
Face value is what the bond will be worth at maturity. This is also the amount you would use to calculate interest payments.
Coupon rate is the amount of interest you will pay on the face value of the bond indicated as a percentage.
Coupon dates are when you make interest payments, usually annual or semi-annual.
Maturity date is when the bond will mature and you need to pay the bond holder the face value of the bond.
Issue price is the price at which you sell the bonds.
No one took my startup seriously until we got a bond.