A bond is essentially a loan an investor makes to the bonds' issuer. That issuer can be the federal government (as in the case of Treasury bonds) or a local government (municipal bonds), government-sponsored enterprises (like Fannie Mae), companies (corporate bonds) or even foreign governments or international corporations. Show The investor, or bond buyer, generally receives regular interest payments on the loan until the bond matures or is "called," at which point the issuer repays you the principal. Bond funds pool money from many investors to buy individual bonds according to the fund’s investment objective. Most bonds pay regular interest until the bond matures. Callable bonds allow the issuer to repay the bond before maturity. Zero-coupon bonds offer a deep discount and pay all the accumulated interest at maturity. Who issues bonds?Governments, government-sponsored enterprises, and corporations issue bonds to raise money for their endeavors. The financial health of the issuer determines how highly (or not) the bonds are rated; higher rated bonds are considered to be safer and therefore pay less interest, whereas lower-rated bonds pay higher interest rates to compensate investors for taking on more perceived risk. An issuer's credit rating can change in either direction over time. In addition to the ratings and interest payments, the institution issuing the bonds can also determine whether or not the income is taxable. A roundup of the types of bonds and information on their issuers follows: Treasury bonds Agency bonds Municipal bonds Corporate bonds Mortgage-backed securities High-yield bonds How a typical bond worksBonds have 3 major components: The first is the face value, also called par value. This is the value the bond holder will receive at maturity unless the issuer defaults. Investors pay par when they buy the bond at its original face value. If bonds are retired by the issuer before maturity, bond holders may receive the par value or a slight premium. The price investors pay when buying on the secondary market (in other words, not directly from the bond’s issuer) may be more or less than the face value. See Bond prices, rates, and yields. Bonds also have a coupon rate. This is the annual rate of interest payable on the bond. (The term "coupon" hearkens to the time bond certificates were issued on paper and had actual coupons that investors would detach and bring to the bank to collect the interest.) The higher the coupon rate, the higher the interest payments the owner receives. With fixed-rate bonds, the coupon rate is set at the time the bond is issued and does not change. Most bonds make interest payments semiannually, although some bonds offer monthly and quarterly payments. Third, bonds have a stated maturity date. Generally, this is the date on which the money you've loaned the issuer is repaid to you (assuming the bond doesn't have any call or redemption features). Callable bondsCallable bonds are bonds that the issuer can repay early, sometimes after a period of several years, at a predetermined price. The attraction of callable bonds is that they typically offer higher rates than non-callable bonds. However, you should understand the call risk. If interest rates drop low enough, the bond's issuer can save money by repaying its callable bonds and issuing new bonds at lower coupon rates. If this happens, the bond holder's interest payments cease and they receive their principal early. If the bond holder then reinvests the principal in bonds with similar characteristics (such as credit rating), they will likely have to accept a lower coupon rate, one that is more consistent with prevailing interest rates. This will lower monthly interest payments. Example: A callable bond Zero-coupon bondsZero-coupon bonds, also known as "Strips," are bonds that do not make periodic interest payments (in other words, there's no coupon). Instead, you buy the bond at a discounted price and receive one payment at maturity. The payment is equal to the principal you invested plus the accumulated interest earned (compounded annually to maturity). Perhaps the best-known example of a zero-coupon bond is a US savings bond, which is a "non-marketable" Treasury security that can be bought directly from the Treasury or most banks. (Fidelity sells other "marketable" zero-coupon Treasury securities that can be bought and sold on the secondary market.) There's a reason these bonds are a favorite gift of many parents and grandparents: Zero-coupon bonds are attractive when you want to save for a defined objective and date, such as when a child starts college. You receive your principal and interest in one lump sum at maturity. Let's say you’re saving for your child's college education, which will begin in 10 years. You could buy a 10-year zero-coupon bond that costs you $16,000, though its face value is $20,000. In 10 years, at maturity, you receive face value of $20K. Zero-coupon bonds have a few drawbacks. First, in most cases, you'll have to pay taxes annually on the interest, even though you do not actually receive the interest until maturity. This can be offset if you buy the bonds in a tax-deferred retirement account, or in a custodial account for a child in situations where the child pays little or no tax. Zero-coupon bonds can also be particularly volatile in the open market, and particularly susceptible to interest rate risk. This doesn't matter if you keep the bond to maturity. But if you need to sell it early, you could incur a substantial loss. Next steps to consider
Your e-mail has been sent. What are callable and nonCallable bonds also come with a call date as part of the agreement, and the issuer is unable to call the bond until the predetermined date. Non-callable bonds, on the other hand, cannot be called until the date of maturity.
What are the features of bond?Characteristics of bonds. Face value. Corporate bonds normally have a par value of $1,000, but this amount can be much greater for government bonds.. Interest. ... . Coupon or interest rate. ... . Maturity. ... . Issuers. ... . Rating agencies. ... . Tools and tips.. What does it mean when a bond is callable?Many bonds issued today are “callable,” which means they can be redeemed by the issuer at set points before its listed maturity date. That means the issuer pays investors the call price and any accrued interest, and doesn't make any future interest payments.
How do you know if a bond is callable?A callable—redeemable—bond is typically called at a value that is slightly above the par value of the debt. The earlier in a bond's life span that it is called, the higher its call value will be. For example, a bond maturing in 2030 can be called in 2020. It may show a callable price of 102.
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