Instrument given by an issuer to the
holder; it is a proof that the issuers owes the holder a debt. It
obliges the issuer to pay an interest from the debt and the owed
principal in the future. The interest is usually paid on a regular
schedule and the bond may be sold after the maturity.
When a governments, municipality, or
company needs additional money, they will issue a bond. But unlike
stocks wherein you're a part of the company, whether it goes up or
down, bonds' price are not subject to change. It is like lending your
neighbor an amount and he/she agrees to pay the amount in the future
together with an interest. The interest which is regularly paid are
called Coupons.
There are several types of bonds
namely: Government, Municipal, Corporate, and Zero-Coupon Bonds.
Government
Obviously, this are bonds issued by the
government itself. They are fixed and usually has the lowest risk
among its species because governments are seldom go to bankruptcy.
Municipal
Also called as “Munis,”
Municipal bonds are bonds given
by the municipality, usually on a resident of the said municipality.
What makes this bonds attractive, taking into account that it has a
higher risk compared to government bonds, is that sometimes the
return from those bonds are free of tax in case the holder is a
resident. But please take note that the yields may be lower than
those taxable ones.
Corporate
The riskiest among them, Corporate
bonds are bonds issued usually by big corporations. It has the most
risk because it has a higher chance of a default. If in case the
corporation who issued the bond became bankrupt, the amount owed
cannot be repaid. But these type of bond usually has the highest
yield compared to the former two.
Zero-Coupon
This type of bond is a bit different.
Compared to the previous types, this bond does not give a coupon but
in return gives a discount on the bond. For example, a $500 bond with
a maturity of 5 years is being traded. After it reaches its maturity
after 5 years, it may be worth $1000.
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