Brian BollenThere are a number of things that would-be investors should expect to feature in a trading course about bonds.
These can be broadly broken down into three areas:
- Basic definitions: general explanations
- Basic definitions: specific explanations
- Beyond the basics into analysis of the investment appeal of a bond.
Basic things to know about bonds: General
What is a bond?
The first thing that any trading course on bonds will surely define the word 'bond. A bond is a form of borrowing. A bond is often referred to as an IOU, written by the borrower (also known as the issuer) to buyers (also known as lenders and bondholders).
The nominal value of a bond is known as the face amount, principal or par value. It is this amount which will eventually be repaid (all other things being equal).
When is interest paid?
Interest, also known as the coupon, is normally paid twice a year.
When will a bond’s principal be repaid?
If no other repayment provisions are made, at the end of its tenor is the answer (tenor is financial industry jargon for the number of years the bond is originally issued for, otherwise known as maturity date).
Recently we have seen 100-year bonds issued. There have also been perpetual bonds issued which need never be repaid.
Is it like equity?
No. It is not like equity in that there is no guaranteed share in any improvements in the borrower’s financial position, unless that increases the secondary market value. Bondholders receive interest payments and repayment of the principal sum.
But it is like equity in that the capital raised helps the borrower to function. Perpetual bonds, because they need never be repaid, can be classed in effect as equity. But unlike equity they do not carry votes.
Some forms of bond (for example the contingent convertible bonds created in the wake of the global financial crisis) will be treated as quasi-equity in the event of a financial disaster hitting the issuer. The return to the bondholder should be higher to compensate for that risk.
