Investing Basics: What are bonds?
Bonds are effectively IOUs issued by governments, companies or other organisations wishing to raise money to fund growth, or restructure their debt.
They are bought by investors such as banks, insurance companies, fund managers and individual investors who receive interest payments in return for the loan of their cash. The issuer is the body borrowing the money.
The coupon is the rate of interest the issuer promises to pay the lender. The maturity is the date at which the borrower repays the lender in full. An issuer wanting to borrow £100 million will typically issue 100 million bonds at Par or 100p. The coupon is set at the point of issue and the agreed percentage is paid annually, or semi-annually, for the duration of the loan.
At the end of the term, each bond is redeemed at Par. Prices quoted in the secondary market are relative to that starting, and finishing, value. Most bonds are Senior Debt, meaning the holder has a claim on a company’s assets ahead of its shareholders. @diyinvestor.net
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