Stock markets are usually the 1st thing which comes in minds of investor whenever they believe of investing their own money. Stocks generate excitement to the investors in the perception that they can volatile and give far better earnings compared to the other equipment. Stocks are high-risk and the return may be unfavorable, but bonds on the other side are secure and stable assets, hence it is one of the most crucial instruments to invest for the investor to shift his collection by investing most of the amount in the risk free investment like bonds.
Like equities, bonds have range of characteristics and every single investor must be aware of them just before investing in a bond.
The face value is the amount which usually investor can get whenever the bonds gets mature. Several investors get mixed up in Face Value and Current Market Price of the bond. Bond price varies due to the constant changes in many factors associated with the bond. If bonds investments at a price greater compared to face value, then the bond is said to be the premium bond, while if its trades listed below its market price it is said to be the discount bond.
Coupon is the interest payment that the bond holder will obtain after every 6 months. Coupon may also be received monthly, quarterly or annually. This is based on the issuer of the bond. Example: if the par value of a bond is $1000 and holds a coupon of 10%, then it will pay out investor $100 as a interest annually.
Date on which investor should receive the main payment and may ranges from 1 day to 15 years and in a few cases 100 years. Normally the bond have low maturity is considered to be less risky in comparison to the one having greater maturity.
Probably the most important determinants of risk of the bond is issuer of the same. If the bond is issued by the govt it is said to be the most secure, in comparison towards the bonds issued by the other company. Bond issued by the govt are called risk free bond because they have low default risk and returns in comparison to the bonds issued by the corporate.
After govt bonds municipal bonds are known to be secure in terms of defaults. Municipal bonds are well-known as “munis” and the return through this group of bonds are tax free. Because of this tax saving feature generate from these category of bonds are lower.
Like stock, companies’ issues bond and have greater yield in comparison to the some other groups of bond. Temporary corporate bond have maturity of 5 years, advanced corporate bonds have maturity varying from 5 to 12 years, while long term bonds have maturity over 12 years.
This type of bond will not create any coupon payment and are given at much discount to the investors. If the par value of the bond is $2000, then it is issued to the investors at $1050 or so, and $2000 is paid to the investors at maturity.
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