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Template:Bond - layman: Difference between revisions
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[[File:Bond certificate.jpg|thumb|A bond certificate with [[coupon]]s on the right]] | [[File:Bond certificate.jpg|thumb|A bond certificate with [[coupon]]s on the right]] | ||
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, | 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, almost all [[bond]]s trade and settle electronically, inside [[clearing systems]], so there are no certificates or | '''[[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. | ||