2.7:
Features of Bonds
Bonds are a form of debt security that provides fixed income that organizations issue to investors to raise capital.
For example, Amazon issues a five-million-dollar ten-year bond with a five-percent coupon rate and a face value of a thousand dollars per bond.
Here, investors are promised a return of their principal, which provides them with a fixed income.
Investors are promised a return of their initial investment after a decade, giving them predetermined maturities. Investors will be able to match their investment horizons to their financial objectives.
If the investor held the bond till maturity, they would receive a thousand dollars per bond regardless of market fluctuations.
Certain bonds, like California Municipal bonds, may offer tax-exempt interest income, making them an attractive investment.
Bonds carry risk, evaluated by credit rating agencies, taking the issuer's creditworthiness and default risk into account.
Higher-rated bonds have lower interest rates due to their low risk of default, while lower-rated bonds offer higher interest rates to compensate investors for high risk.
These features appeal to conservative investors seeking stable returns.
2.7 Features of Bonds
Bonds can be purchased at par, discount, or premium, each reflecting the bond's current market value in relation to its par value. The 'par value' is the amount the bond will be worth at maturity. The 'market value' is the current price at which the bond is trading in the market.
Bonds come with various features regarding flexibility, such as scalability, which allows the issuer to repurchase the bond before maturity, often at a premium price. This benefits the issuer during periods of falling interest rates, allowing them to refinance debt at a lower cost.
Another aspect is the convertible nature of some bonds, providing the option to convert the bond into a predetermined number of shares of the issuing company. This can attract investors if the company's stock price rises significantly.
The tax treatment of certain bonds can encourage investments. Municipal bonds, for instance, offer tax-free interest income at the federal and often state and local levels. This can prove advantageous for investors in higher tax brackets.
Bonds are a component of diversified investment strategies, suitable for conservative investors seeking a steady income and capital preservation.