A bond is an IOU instrument. This means that an issuer of a bond owes certain amount to the subscriber and agrees to pay the amount to the subscriber after a specified period of time. The amount owed is in form of a principal amount and an interest component on the same. This definition of bond brings out four key features of a bond:
1) Face Value: The value at which bond is issued.
2) Maturity Period: The period after which the bond amount is paid back to the subscriber
3) Coupon: The interest paid on the bond.
4) Redemption Amount: Same as face value in most of the cases, barring zero coupon bonds.
The bonds issued are of different types which can be described as follows:
Government Bonds
These bonds are by the respective governments across the world. The bonds issued by the governments in USA, Germany, Japan and the United Kingdom, are typically among the most secure marketable investments in the world. The risk of default on sovereign debt (as government debt issues are generically known) in more volatile developing economies is significantly higher.
Governments may issue debt instruments denominated in domestic currency or in foreign currency. Whereas governments rarely default on domestic currency government debt, default on foreign currency government debt is more common.
The most widely traded government bonds include:
USA = Treasury Bonds or Treasury Notes
UK = Gilt-Edged Securities (or Gilts)
Japan = Japanese Government Bonds (JGBs)
German = Bunds and Schatz
French = OATs and BTANs
Domestic Bonds
A bond issued by a borrower resident in the country of issue, denominated in the local currency and regulated by the regulatory authority of the jurisdiction concerned. For example, a bond issued by a US company in US dollars in the USA is a US domestic bond.
Foreign Bonds
A foreign bond is one issued by a foreign issuer in the local currency in the local market. For example, a US dollar bond issued in the USA by a non-US company is a foreign bond. Foreign bonds are often given colloquial names like Yankee, Samurai, Bulldog and Matador.
Eurobonds
A eurobond is a bond issued by a company and sold to investors outside of the country where the currency is employed. For example, a US-denominated bond sold outside of the US (designed to borrow US dollars circulating outside of the US) would typically be referred to as a
eurodollar bond. This may, for example, represent a dollar-denominated debenture issued by a Dutch company through an underwriting group consisting of a syndicate investment banks (for example, Dutch, UK and US investment banks).
Convertible bonds
A convertible is a bond that gives the holder the right, but not the obligation, to convert the bond into a specified number of underlying shares (normally ordinary shares) of the issuing company on terms that are set out at the time of issue of the bond. Convertible bonds commonly pay lower interest than straight bonds, but provide greater opportunity for capital gain if the price of the underlying shares of the company appreciates during the loan period. Holders of unconverted bonds at maturity retain the right to redeem the bonds at nominal value, as for regular bonds. The conversion rate is the number of shares that are received for each bond. For example, an investor exercising a convertible bond with a conversion rate of 2 would receive 2 shares for
each bond exercised.
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