1. Bonds : What are they?

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From the course by Indian School of Business

Introduction to Financial Markets

580 ratings

Indian School of Business

Introduction to Financial Markets

580 ratings

Course 1 of 5 in the Specialization Financial Markets and Investment Strategy

Learn the general concepts of financial markets and economy. You will see the difference between primary and secondary markets and learn about markets for different products. You will also look at various economic Indicators and their influence on the markets. After completing this course, you will have a much stronger background of financial markets and ready to go to the next stage in the Specialization. This course is designed to help students with very little or no finance background to learn the basics of investments.

From the lesson

Fixed Income Markets

In this module you will be exposed to the fixed income markets. Various types of fixed income securities available in the market are discussed. Learners are also taught the bond terminology.

1. Bonds : What are they?6:13

2. Interest Rates or Yields : Finding Direction9:11

3. Calling a Bond : Expect the unexpected7:57

4. Bond Ratings : Necessary, not Optional11:29

Meet the Instructors

Vaidya Nathan
Lecturer
Finance

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, and

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 dudes own bonds as they own stocks.

So 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 issues 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, we'll just say corporates.

If it's a municipal bond, bond traders would call that municipals.

If it's a government bond, we say governments.

If it's a federal agency that's issued the bond, we call it agencies, and so on.

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 will also mentions what

is a compensation that the bond holder will receive for renting out his capital.

And this composition is typically paid on a semiannual 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 bond's 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 come to in very shortly we talk about why it is called a coupon and

the period of time in which the bond is outstanding, is called as a term.

And 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.

[COUGH] 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 IOU's, 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.

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