wealtheducation-what_are

What are Bonds?

Bonds can mean a lot of things, but we are referring to bonds in the financial world. A bond is a debt instrument use to raise capital, which is either known as a corporate bond or a government bond.

A Corporate Bond is a bond issued by a corporation. It is a bond that a corporation issues to raise money in order to expand its business. The term is usually applied to longer-term debt instruments, generally with a maturity date falling at least a year after their issue date. (The term "commercial paper" is sometimes used for instruments with a shorter maturity.)

A Government Bond is a bond issued by a government to raise money the government needs to either inject it back into the economy or keep it into its reserves for future uses.

A bond is base on 2 key factors, namely (1) How long will the bond be repaid? We term it as maturity. And (2) How much coupon rate or interest rate will the investor be paid?

Coupon rate is also term as Yield to Maturity or YTM.

A corporate bond is said to be of higher risk or higher default risk than a government bond. Therefore a government bond usually have a lower YTM than a corporate bond. Therefore in order for a corporate bond to attract investors, they have to offer a higher YTM than government bonds.

Corporate bonds are often listed on major exchanges, such as the Chicago Board of Trade, CBOT.

There are also other type of bonds such as convertible bonds which allows the investor to covert bonds to equity.