Answer:
Bonds refer to debt instruments wherein the issuer raises long term finance and agrees to pay the lenders a fixed coupon rate of payments periodically and principal repayment upon redemption.
Bonds are characterized by following :
- Face value : This refers to the par value at which bonds are issued and coupon payments are fixed as a percentage of face value.
- Fixed rate of coupon payments: Bonds are characterized by a fixed rate of coupon payments i.e interest payments to the lenders periodically and obligatory. It may be paid semi annually or annually.
- Maturity : Bonds are to be redeemed by the issuer after a certain period ranging from, say 5 years to 20 years. This means the lenders will be paid back their principal upon such redemption.
- Credit Ratings: Bonds are issued with credit ratings such as AAA or AA or BB. AAA is considered to be the best rating. The higher the credit rating, the more attractive such bonds are to the investors as it indicates better credit worthiness of the issuer company.
- Issuer: The issuer refers to the agency or the company that issues bonds to the investors. Bonds may be issued by municipality, government or corporate firms. The terms differ accordingly.