Learning Outcomes. After watching this video, you will be able to understand the bond market, and you will also be able to differentiate between the various types of bonds. Bonds. If you were to look at a newspaper like The Financial Times or any financial newspaper, you'll find a lot of news articles related to stocks. But rarely if ever, do you find mention of bonds. So bonds are widely regarded as the most conservative investments that you can make. Generally, they do not experience a lot of dramatic changes in prices day-to-day. So they don't make for very exciting reporting and that's one of the reasons why you don't find bonds being reported in the newspapers all day. But that being said, bond markets are actually larger than stock markets. In recent years, a majority of corporate financing which can either happen through debt or through equity, a lot of corporate financing has been accomplished through bonds. Moreover, though this is not very well-known, but as many individuals own bonds as they own stocks. Bonds are issued by various entities like corporations, state governments, local governments, their agencies, for instance in the US, the federal government, the United States government issues bonds, its agencies, the federal agencies issue bonds and so on. Now professional bond traders typically use one-word designations for the bond of each issue. Which are for instance, if it's a corporate bond, okay they'll just say corporates. If it's a municipal bond, bond traders would call that municipals. If it's a government bond, they say government's. If it's a federal agency that's issued the bond, we call it agencies and so on. So while each of these bonds have unique characteristics for instance corporate bonds are different from municipal bonds from government bonds, but all of them have one basic function, which is that they are all formal I owe you, in which the issuer typically promises to repay the total amount borrowed at a predetermined date. So in addition, the issuer also mentions that what does the compensation that the bondholder will receive for renting out his capital. This compensation is typically paid on a semi-annual basis and more often than not, these are fixed interest rates that are paid during the years in which the bond is owned. So in the language of bonds, the total amount to be repaid is called variously in different forms as either the principle amount or the face value or the par value. The repayment date is typically known as the maturity date. The interest rate of the bond is called a coupon, okay and we'll come to very shortly we'll talk about why it's called a coupon, and the period of time in which the bond is outstanding is called as the term. All this information is printed on the face of a bond. So if you look at a bond certificate, you'll find all that information in the bond certificate. Now in the past, bond certificates would come with coupons attached. So you'll have a certificate with perforations of coupons and which your coupons are typically periodically clipped from the bond certificate and presented for payment, and that's how interest payments came to be known as coupons, which have now become synonymous with fixed interest payments. There are two ways in which bonds can be owned. They can be owned in a registered format, in which case the corporation which has issued the bond actually has in its registry the name of the owner of the bond or it could be in bearer form in which case whoever has the bond with him or her, is essentially considered the owner. Most corporate bonds are registered bonds while municipals and government bonds are issued as bearer bonds. A bond certificate then is essentially a certificate of indebtedness, spelling out the terms of the issuer's terms to repay the money. Sometimes this promise of repaying is reinforced by collateral such as equipment or property. But usually bonds offer only what is called as the full faith and credit of the borrower. Sometimes bonds are also called as debentures. These are essentially uncollateralized IOUs in which case the issuer is not putting any collateral of plant or machinery or equipment. In terms of the risk, the obligations issued by the government are regarded as the safest investment that is possible. After all, as the saying goes, only the government has the ability to print money.
