6 facts you need to know before you start investing in bonds

Why are interest payments on bonds are call coupon rates?

Precomputer days, Bonds had coupons that must be clipped off and presented to claim the interest payments. The name just stuck around.

What is the “Par value” of a bond?

Par value or otherwise known as “face value”, is the payment owed to the bond-holder when the debt matures.

What is the difference between loans & Bonds?

Both Loans & Bonds are called debt or Fix-income securities.

The differences come from,

  1. Loans are issued by financial institutions and bonds are issued by the company to any willing third-party buyer.
  2. Interest payment loans are set at a higher rate than bonds.
  3. Companies have a great amount of flexibility with how capital raised from bonds is used. Unlike Capital from Loans, which are often legally bonded to serve a specific purpose. 
  4. Loans have a higher pecking order than bonds(Especially if you are a retail bondholder).

Are Floating rate bonds considered Fix-income securities?

Yes! Contrary to popular belief, the formal definition considers  Fix-income securities to be a type of debt instrument that provides a regular or fixed interest payment periodically and repayment of the principle once its reaches maturity.

The interest payment can be Fixed( Fix-rate) or based on a predetermined formula( Float-rate). 

If I sell my bonds before the next interest payment would I have to forfeit on interest earned for the next payment? 

No! There is Accrued interest payment owed to you starting from the duration of your last coupon payment to the number of days held before your next bond payment.

An example: “ A bond is quoted at $1000 with a coupon rate of 4% per annual. The Coupon payment is issued semiannually. Suppose that, you have just been issued the first coupon payment of $20. And 90 days have just passed since the issued date. The sale price of the bond would be valued at Quoted price + Accrued interest. The accrued interest is (90/182*)x$20=$9.89. Hence, the sale price would be $1009.89.

182* represents half the year since the Coupon payment is issued semiannually.

Can your bond be priced at a lower value than what you paid initially? 

Yes! You may lose a part of your invested amount if you sell your bonds before it matures.  Bond prices fluctuate depending on the perceived credit quality of the issuer and market conditions like interest rate. This type of bond are called “negative bond yield”