Template:Bond - layman: Difference between revisions
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A [[bond]] is a form of [[loan]]. It is like a | A [[bond]] (also called a “[[note]]”, “[[MTN]]” or a “[[debt security]]”) is a form of [[loan]]. It is like an [[IOU]] from a company or a government. Instead of taking one big [[loan]] from a [[bank]], a company issues lots of little loans, in the form of bonds to investors. To buy a bond is to lend money to the issuing company, who must repay that money by “redeeming” the bond its stated [[maturity date]]. In the good old days, [[bond]]s were security-printed certificates with the loan [[terms and conditions]] printed on them. | ||
'''Repayment to [[bearer]]''': The company will pay principal and interest to the | '''Repayment to [[bearer security|bearer]]''': The company will pay principal and interest to the “[[bearer security|bearer]]” of a bond — that is, whoever holds it, and who turns up on the correct payment date and presents the bond to the issuer for redemption. | ||
'''[[Interest coupons]]''': If interest is payable, the bond will have coupons — literally, little perforated tabs that you can tear off and present separately — for each interest payment. Hence the expression “[[coupon]]” has become synonymous in modern finance with [[interest]]. | '''[[Interest coupons]]''': If interest is payable, the bond will have coupons — literally, little perforated tabs that you can tear off and present separately — for each interest payment. Hence the expression “[[coupon]]” has become synonymous in modern finance with [[interest]]. | ||
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'''[[Transferability]]''': Because the issuer pays whoever holds the bond, this means the bond is [[negotiable]] — any bondholder can sell its bond to another investor without the issuer’s permission or knowledge. The issuer doesn't care: it has to redeem the same number of bonds, whoever holds them. | '''[[Transferability]]''': Because the issuer pays whoever holds the bond, this means the bond is [[negotiable]] — any bondholder can sell its bond to another investor without the issuer’s permission or knowledge. The issuer doesn't care: it has to redeem the same number of bonds, whoever holds them. | ||
'''Electronic trading''': Nowadays, | '''[[Electronic trading]]''': Nowadays, almost all [[bond]]s trade and settle electronically, inside [[clearing systems]], so there are no certificates or [[coupon]]s, and everything happens in the blink of an eye. But the principle is the same. | ||
Latest revision as of 08:19, 15 June 2023
A bond (also called a “note”, “MTN” or a “debt security”) is a form of loan. It is like an IOU from a company or a government. Instead of taking one big loan from a bank, a company issues lots of little loans, in the form of bonds to investors. To buy a bond is to lend money to the issuing company, who must repay that money by “redeeming” the bond its stated maturity date. In the good old days, bonds were security-printed certificates with the loan terms and conditions printed on them.
Repayment to bearer: The company will pay principal and interest to the “bearer” of a bond — that is, whoever holds it, and who turns up on the correct payment date and presents the bond to the issuer for redemption.
Interest coupons: If interest is payable, the bond will have coupons — literally, little perforated tabs that you can tear off and present separately — for each interest payment. Hence the expression “coupon” has become synonymous in modern finance with interest.
Transferability: Because the issuer pays whoever holds the bond, this means the bond is negotiable — any bondholder can sell its bond to another investor without the issuer’s permission or knowledge. The issuer doesn't care: it has to redeem the same number of bonds, whoever holds them.
Electronic trading: Nowadays, almost all bonds trade and settle electronically, inside clearing systems, so there are no certificates or coupons, and everything happens in the blink of an eye. But the principle is the same.