Question

Mention and describe the full characteristics of traditional bonds:

Answer 1

Full Characteristics of Traditional Bonds:

In Finance, a traditional bond refers to a fixed income instrument that represents a loan given by an investor to a borrower (usually corporate or governments)

Characteristics of a Traditional Bond:

Face Value/Par Value:This refers to the amount that the borrower(seller)  will repay back the lender (ie. Buyer) of the bond at maturity.This is usually $1000.Face-Value is also known as Par Value.

Coupon: Coupon is the interest rate that the bond issuer(borrower) pays to the bond holder(lender)throughout the life of the bond.

Usually, this is paid at a six-month interval,but it can also be paid monthly, weekly, annually, quarterly,etc.

This can either be fixed(ie. the same amount is paid every time) or it is floating(ie. tied to some market rate such as LIBGOR)

Yield:Yield is the rate of return from investing in the bond.It may refer to Current Yield :which is simply the annual interest rate payment on the bond divided by the current market price of the bond .It may also mean the Yield-To-Maturity(YTM):which takes into account not only the current market price of a bond but also the amount as well as the timings of all remaining coupon payments as well as the repayments due on the maturity of the bond .Simply put: YTM is the internal rate of return on a bond.

Market Price:This is the price at which a bond is trading in the secondary market.It is determined by the market forces of demand and supply

Issue Price : This is the price at which the investors buy the bond when it is being issued for the first time.

Discount/Premium:When a Bond is trading at a price below the Face Value or Par Value it is said to be at Discount. Similarly, when the bond is trading at a price above the Face Value or Par Value, it is said to be at Premium

Maturity: Maturity refers to the date at which the issuer of the bond will repay back the principal amount to the bond holder

They can range from one day to even 30 years.the longer the term to maturity, the higher will be the interest rate.

Issuers: They are the ones who issue the bond.They may be corporate or government

Bond Rating:Rating Agencies assign rating to the bonds on the basis of a number of factors.These help the investors to get an ideas of the risks associated with the bond and the chance of default(ie. the issuer being unable to repay back the principal amount)

The highest rating is AAA while the lowest rating is D.

Some common rating agencies are: Moody and Standard and Poor