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BONDS

Bonds

After stocks (covered later on) bonds are perhaps the financial instruments most familiar to the general public. When a corporation (or the government) wants to borrow funds for a certain amount of time, a common practice is to sell bonds. While stockholders of a company are part-owners in the company, bondholders are lenders, providing loans to the company in return for a guaranteed interest rate. Therefore bonds are certificates of indebtedness issued by the companies to the lenders. One might also view them as promissory notes issued by the company to pay the lender the principal at a stated time, known as the maturity date, with periodic interest payments until the maturity date is reached.

Bonds are generally considered as fixed-income investments since bond holders draw a fixed amount of income as interest payments. The interest payments on bonds are usually referred to as coupon payments. This reference is nostalgic in nature since in the past the bondholder had a coupon book, with each coupon representing a particular interest payment. Every time the bondholder was to collect the interest payment, he would tear out the specific coupon and present it to the issuer or an authorized bank. Today this procedure is automated and handled electronically, but it is still referred to as coupon payment. …