Bonds
- Bonds are debt instruments issued by a company or a government entity (‘Issuer’).
- The Issuer will pay a coupon (interest) to the bond investor based on a schedule. This schedule can be on a quarterly, semi-annual or annual basis.
- At maturity, the Issuer will return the principal back to the investor.
- A bond typically pays regular coupon (interest) to customers based on a fixed schedule.
- Subject to issuer risk, a bond will return the principal back to the customer at maturity.
- A bond has varied tenor (from anything as short as a few weeks to as long as 30 years), so an investor should be able to find a bond that suits his investment horizon.
- Present value of the coupons and principal in the holding period.
- Bond prices are typically quoted as a percentage eg. 100.3% or 98.2% of par value of bond.
- Bonds with prices quoted above 100% are trading at a premium.
- Bonds with prices quoted below 100% are trading at a discount.
- Bond prices move in the opposite direction of interest rates i.e. if interest rates rise, the price of a bond will fall and vice-versa.
Issuer Risk
Subject to issuer risk, a bond will return the bond investor his/her principal back at maturity.
What this means is if the issuer goes bankrupt, a bond investor will likely not get back his principal.
Price Risk
Bond Prices are affected by interest rate movements. Typically when interest rates rise, bond price falls.
Investors should be aware that the price of their bond may fall due to interest rate rises.
Reinvestment Risk
Although investors do receive coupons on a regular basis, they may not be able to reinvest the coupons at the same rate that they received the coupons at.
