Bonds are a form of borrowing. They are debt securities issued by borrowers such as governments or companies seeking to raise funds from the financial markets.
They are also known as fixed income securities because most bonds pay a steady stream of interest income at periodic intervals throughout the life (also known as the term or tenure) of the bond. This interest is known as the “coupon” and the coupon rate is expressed as a percentage of the principal, known as the “face” or “par” value of the bond. Bond prices are usually expressed as a percentage of face value.
Upon maturity, bonds are redeemed at face value and bondholders are paid 100% of face value. Some bonds do not offer coupons at all – these are known as ”zero-coupon bonds” and are priced at a discount to their face value. At maturity, you will receive the face value (which includes the accrued interest on the note). The yield depends primarily on the credit quality of the bond issuer. In any local market, the highest quality bonds are usually government bonds. They are usually followed by quasi-government or government linked entities, banks and then companies.
Bonds (and some Governments and Companies) are rated by companies who specialise in this area namely Standard and Poors, Fitch and Moodys. For ease of reference there is a table explaining the various ratings below:
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