MSG Team's other articles

9319 Financial and Economic Models used in the Equity and Currency Markets

We often read about how electronic and software based trading is the norm in stock or equity markets as well as currency and other financial markets. Indeed, anyone who is remotely connected with the stock market or for that matter any financial market would know that there are trading systems and trading software that help […]

9475 Goldman Sachs and the 1MDB Scandal

The 1MDB scandal is a scandal of epic proportions that was uncovered in Malaysia almost five years ago. This scandal has led to a lot of consequences in Malaysia. For instance, this was the main reason behind the sudden downfall of the previous Malaysian Prime Minister Najib Razak’s government. The main accused, Jho Low, who […]

11848 Contribution Margin

Rearranging the Profit Equation: The contribution margin is created by rearranging the profit equation to provide the requisite details. The profit equation is as follows: Profit = Selling Price (x) – Variable Costs (x) – Total Fixed Costs It can be rearranged as : Profit = (Selling Price – Variable Costs)x – Total Fixed costs. […]

10736 Problem with Private Securities Offerings

The average person believes that they are legally allowed to make any investment that a rich person can. However, this is not true in America, and this is certainly not true in many parts of the developed world. The reality is that the average American population is only legally allowed to purchase securities which are […]

10695 Preferred Shares: An Introduction

Whenever the topic of fixed income securities is considered, the obvious assumption many investors make is that the conversation is about bonds. It is true that bonds are the most commonly traded types of fixed-income securities. However, they are not the only type of fixed-income securities. Preferred shares are another common type of fixed income […]

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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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