Explanation:Typically, a bond is issued at a discount or premium depending on the market rate of interest. The bondholder pays the face value of the bond to the bond issuer. The bond is then paid back to the bondholder at maturity with monthly, semi-annual, or annual interest payments. Companies, non-profit organizations, and government municipalities use bonds to raise funds for current operations and expansions. Since companies have several ways to finance expansions, they tend to use bond financing less regularly than government municipalities. Companies can raise funds through equity financing and traditional loans.
In a nutshell:
- Bonds are units of corporate debt issued by companies and securitized as tradable assets.
- A bond is referred to as a fixed-income instrument since bonds traditionally paid a fixed interest rate (coupon) to debtholders. Variable or floating interest rates are also now quite common.
- Bond prices are inversely correlated with interest rates: when rates go up, bond prices fall and vice-versa.
- Bonds have maturity dates at which point the principal amount must be paid back in full or risk default.