A bond is a security title of receivables (debt) representative of a loan. Giving entitlement to a refund plus d´interets, the obligation is transferable and therefore subject to a rating on a stock exchange or a secondary market.
A c´est obligation debt
Take a person who is a real estate credit, this person will therefore pay to the lender interest and repay the capital loaned. This repayment of capital and interest is nothing d´autre qu´un paper requiring the person who borrowed to repay. For the lender it is therefore an obligation of reimbursement at a rate agreed d´avance. An obligation is therefore nothing d´autre than that, c´est to say ready d´un refund. When l´on subscribed to an obligation, it lends money to the issuer from the requirement. The latter has a debt to the creditor; It undertakes to repay the maturing obligation. A c´est a duty title marketable debt instrument that corresponds to the amount of a loan. Generally bonds are issued by:
• a State in its own currency – referred to as borrowing of State;
• a State in a currency other than their own – one speaks then of sovereign obligation;
• a company from the public sector, a public body, a local community – it is considered an obligation of the public sector;
• a private company, an association, or any other person.
In general d´etats bonds are less risky and therefore less relevant, often considered that l´obligation d´etat is a requirement without risk, but this is definitely an error (see l´article http://richesse-et-finance.com/gouvernement-aux-abois/).
The different types of bonds
There are several types of bonds:
• Fixed-rate bonds: the interest rate and the frequency of the payment of interest shall be fixed at the issuance of the obligation. Remuneration is therefore regular until the maturity of the obligation.
• Variable-rate bonds: interest rate is indexed to a benchmark rate of the market, plus a fixed rate.
• The zero coupon bonds: they do not give rise to any payment of interest but are reimbursed at a price higher than the issue price.
• The unique coupon bonds: coupons (interest) are capitalized and paid only once at the maturity of the obligation.
• Convertible bonds: these bonds can be exchanged for shares of the issuing corporation terms laid down at the issuance of the obligation.
• Actions (bond) warrant bonds: these are obligations to which are attached one or more warrants to subscribe for new shares of the issuer.
• Income: most bonds guarantee investors a regular intake of fixed income. The redemption price and the interest are known to show and do not change during the life of the bond.
• Diversification: bond allow for equity investors to diversify their investments and to compensate their possible downside risk. Indeed, the performance of shares and bonds often evolve in opposite directions.
• Protection: bonds that pay a fixed income allow investors to hedge against the risk of economic recession or deflation. For their part, debt instruments linked to inflation allow them to protect their purchasing power of inflation.
• Filing for bankruptcy: companies may have to default on their loans, especially in the event of bankruptcy. Apart from government bonds (and), the bonds can be risky.
• Early repayment: some bonds may be redeemed prior to maturity: in this case, the issuer repays l´obligation 'poll. If you have a refundable advance obligation and this option is exercised, you'll have to get your initial investment, as well as the interest due to this day; but you will not receive future interest that you would have seen otherwise. Typically, corporations use this option when the current rate of the new bonds is lower than old l´obligation. They are somehow a credit redemption.
• Inflation: If inflation rises, the coupons of your bonds will depreciate. Inflation-indexed bonds to hedge against this risk.
• The sale before maturity: If you decide to get your money back before the end of your obligation, you run the risk to recover an amount less than your initial bet. If interest rates rise, the value of the old bonds on the market will go down: indeed, newly issued similar bonds offer coupons higher than those of your obligations. Conversely, if interest rates fall, the value of the bonds will increase.
The concrete, nothing to the concrete:
The simplest way to understand the obligations c´est take a look at sites like unilend-lendix-Finsquare etc because the maturities of the bonds are repaid at constant maturity. In other words, l´investisseur receives each month a sum of money consisting of interest and a portion of the capital loaned. c´est so very easy to understand.
L´obligation is a good product to start, it is easy to understand and does not fear much, especially if your d´interet rate is variable. The interest of the bonds is to be an asset"safely" which guarantees the borrower to recover its funds in addition to receive interest annually. But the obligation does not take advantage of the good yields of the bullish phases of the stock exchange. To do this, financial invented the bonds convertible into shares.
To deepen your vocabulary:
For the understanding of obligations, some notions proved indispensable:
• The nominal (or face value or principal): it is equal to the starting capital borrowed by the issuer of the obligation divided by the number of issued securities. For example, an issuer decides to borrow one million euros. This capital will be divided into different cuts, for example of 1,000 euros to facilitate exchanges on the market. This amount of 1,000 euros corresponds to the nominal value of the bond.
• The expiry or maturity: this is the life expectancy of the obligation. It can match the date to which the bondholder's are reimbursed for the full amount of the nominal i.e. capital borrowed by the issuer. We talk of the fine in principal repayment. This rebate can also be scheduled and realized by a constant amortization (amount varies, but each installment includes an identical share coupon and capital) or by constant annual instalments (the amount reimbursed is identical, but the amounts of principal and interest change). The average maturity of a bond is ten years.
• Coupon: it corresponds to the periodic payment of interest to the bondholder. Depending on the nature of the obligation, the payment of interest can be regular (usually annually) or intervene at maturity, ultimately. Similarly, the interest rate may be fixed (the perceived interest income periodically is constant) or variable (the interest rate varies according to the market rates).
• The accrued coupon: it represents the share of the interest due but not yet paid.
• The issue price: it corresponds to the price of the bond at the time of its broadcast. This price may differ from the nominal value. If the issue price is greater than the nominal, told that the requirement is "above par" and vice versa if the issue price is less than the nominal value. It is therefore a premium or a malus if the d´emission price is different. On sites finsquare for example, the d´emission price is always equal to the nominal value.
• The course of duty: it corresponds to the price at which Exchange the obligation on the secondary market (the Exchange). It is usually expressed as a percentage of the nominal value so as to facilitate comparison between different obligations that present different characteristics.
• The redemption price: it corresponds to repayment of the obligation at its maturity. It may be greater than the nominal value to make the requirement more attractive for investors. The difference between the redemption price and the nominal value is called the redemption premium.
If one speaks d´obligation vanilla one speaks d´une obligation which the capital is repaid in fine c´est to say at the end (in English, spoken of bullet bonds) au c´est-IE without premium paying a fixed rate, said "nominal rate" via a single annual coupon. What are simple to understand.