Debt security
“Bond” as explained to my neighbor Phil
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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. |
Financial concepts my neighbour Phil was asking about when I borrowed his mower.
Index: Click ᐅ to expand:Edit A freely transferable financial instrument evidencing indebtedness. Comes in a few different types:
By type of issuer
- Government bonds - issued by sovereigns so existing free of capital structure, logically immune to insolvency, but practically distressingly capable of default (yes we're looking at you Argentina) and of course the “who’s queen?” gambit
- Corporate bonds
- Structured notes — weird &wacky securitised derivatives, issued outta espievies
By name
Categorisations that will appeal (and occur) only to etiquette freaks — the sort of folk who are jazzed by which side of your plate you take the bun from — and lawyers:
- bond - traditionally a fixed rate debt security
- Note - traditionally a floating rate security
- Medium term note - A debt secuyrity issued off a programme rather than as a stand alone)
By position in the capital structure
Senior
Pari passu
- Bond: A bond is a debt security, traditionally bearing a fixed rate of interest, and issued as a stand-alone (rather than off an MTN programme).}
- Note: A note is a debt security, traditionally bearing a floating rate of interest, and issued as a stand-alone (rather than a medium term note, which is issued off an MTN programme).
- Medium term note (or “MTN”): A medium term note is a debt security, which may bear a fixed or floating rate of interest (or some other kooky derivative payoff), and is issued off an MTN programme). At one time, MTNs were typically issued only for a medium term — up to about 5 years — but that's all gone now. They still get called medium term notes though. In practice standalone bonds and notes are far less common these days, because they’re such a faff to issue and list, whereas MTNs are much easier and do pretty much the same job. I know how much you love a metaphor, so think of bonds and notes as broadsheet newspapers, and MTNs as an android app.
- Convertible bond: