MSG Team's other articles

11858 Sustainable Growth Rate and the Du-Pont Analysis (PRAT Model)

We now have a basic understanding of the concept of sustainable growth rate and how it related to the valuation of any given firm. In this article, we will dig deeper in the same formula in an attempt to connect it with the famous Du-Pont model which is used worldwide to predict the Return On […]

10383 Money Market Reforms

The money market is interlinked with other markets such as the stock market and the bond market. As such, if there is turbulence in the money market, it often quickly spirals to other areas of the economy as well. This has already been in the 2008 global crisis. The liquidity crisis which greatly exacerbated the […]

11785 The Voting Process

After the solicitation, packages are sent out, and the creditors are given all the information that they need, it is time to vote. Voting is an important part of the reorganization process. This is the part where the will of the creditors becomes known to the debtor organization and to the public in general. However, […]

11015 Lease Accounting: Right of Use Asset

In the previous couple of articles, we have already seen that sporting franchises prefer to lease out stadiums instead of investing their capital and building them. We also know that these leases need to be accounted for on the balance sheet of the sporting franchise. We learned about the basics of lease accounting. However, it […]

12150 Pension Obligation Bonds

Pension funds across the world are facing a significant financial crisis. This is because, for a very long time, they have been investing heavily in equities since the interest rates offered by debt funds were quite low. However, in the recent past, the equity markets have sharply declined. As a result, the asset values of […]

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Why Investment is Important ?

Every individual needs to put some part of his income into something which would benefit him in the long run. Investment is essential as unavoidable circumstances can arise anytime and anywhere.

One needs to invest money into something which would guarantee maximum returns with minimum risks in future. Money saved now will help you overcome tough times in the best possible way.

What are Bonds?

Bonds are issued by organizations generally for a period of more than one year to raise money by borrowing.

Organizations in order to raise capital issue bond to investors which is nothing but a financial contract, where the organization promises to pay the principal amount and interest (in the form of coupons) to the holder of the bond after a certain date. (Also called maturity date). Some Bonds do not pay interest to the investors, however it is mandatory for the issuers to pay the principal amount to the investors.

What is a Maturity Date?

Maturity date refers to the final date for the payment of any financial product when the principal along with the interest needs to be paid to the investor by the issuer.

Characteristics of a Bond

  • A bond is generally a form of debt which the investors pay to the issuers for a defined time frame. In a layman’s language, bond holders offer credit to the company issuing the bond.

  • Bonds generally have a fixed maturity date.

  • All bonds repay the principal amount after the maturity date; however some bonds do pay the interest along with the principal to the bond holders.

Bonds

Types of Bonds

Following are the types of bonds:

  1. Fixed Rate Bonds

    In Fixed Rate Bonds, the interest remains fixed through out the tenure of the bond. Owing to a constant interest rate, fixed rate bonds are resistant to changes and fluctuations in the market.

  2. Floating Rate Bonds

    Floating rate bonds have a fluctuating interest rate (coupons) as per the current market reference rate.

  3. Zero Interest Rate Bonds

    Zero Interest Rate Bonds do not pay any regular interest to the investors. In such types of bonds, issuers only pay the principal amount to the bond holders.

  4. Inflation Linked Bonds

    Bonds linked to inflation are called inflation linked bonds. The interest rate of Inflation linked bonds is generally lower than fixed rate bonds.

  5. Perpetual Bonds

    Bonds with no maturity dates are called perpetual bonds. Holders of perpetual bonds enjoy interest throughout.

  6. Subordinated Bonds

    Bonds which are given less priority as compared to other bonds of the company in cases of a close down are called subordinated bonds. In cases of liquidation, subordinated bonds are given less importance as compared to senior bonds which are paid first.

  7. Bearer Bonds

    Bearer Bonds do not carry the name of the bond holder and anyone who possesses the bond certificate can claim the amount. If the bond certificate gets stolen or misplaced by the bond holder, anyone else with the paper can claim the bond amount.

  8. War Bonds

    War Bonds are issued by any government to raise funds in cases of war.

  9. Serial Bonds

    Bonds maturing over a period of time in installments are called serial bonds.

  10. Climate Bonds

    Climate Bonds are issued by any government to raise funds when the country concerned faces any adverse changes in climatic conditions.

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