Bonds: Introduction and Terminology

Question 1

What is a bond?

Answer 1

A debt (loan) instrument whereby an investor lends money to an entity (eg a company or a government) that borrows the funds for a defined period of time at a fixed interest rate.

Question 2

Who issues bonds?

Answer 2

• Companies issuing corporate bonds
• Governments issuing government bonds

Question 3

What are UK Govt Bonds known as?

Answer 3

• Gilts as the first certificates had a gold edge

Question 4

Why borrow money through bonds?

Answer 4

• Cheaper, as companies can borrow at lower rates of interest compared to banks.
• Greater Control & Freedom: companies can make multiple bond issues and companies do not have to meet a banks’ requirements
• More achievable: companies can borrow very large sums of money

Question 5

What is nominal value?

Answer 5

• The original amount of the bond purchased with this amount paid back to the bondholder at the redemption date.

Question 6

What is the coupon?

Answer 6

• The interest rate paid to the bondholder every year or half yearly. Coupons are calculated on the nominal value of the bond.

Question 7

What is redemption?

Answer 7

• The date at which a bond matures and pays back the nominal value to the bondholder