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Bonds represent a credit or loan relationship between a creditor (the party who gives money) or a number of creditors and an endorsee (the party who receives the money) or a group of endorsees.
Bonds come in many forms and types. Traditionally a creditor lends money to the endorsee and in return the endorsee pays back the lended amount (called principal) and also an additional sum of money set upon the issue (upon lending to the endorsee) of the bond. This additional sum is usually set as a percentage of the principal, although there are bonds that don’t pay interest, instead they can be bought with a discount of the face value. What this means is that they can be bought at a price that is lower than the face value of the bond. Face value is the principal of all the bonds and one bond’s face value is a proportin of the principal, that is calculated by dividing the total lended amount with the number of bonds.
Bonds can be either:
- Payable to bearer,or,
- Payable to order.
Payable to bearer means that neither the lender, nor the borrower is named. However the holder of a payable to bearer bond cann add his/her name to this kind of bonde, and thus this bond is converted to (becomes) a payable to order type of bond.
A payable to order bond is a type of bond that is endorsed, meaning the holder (lender) has exclusive right to the cash flows of the bond.
Bonds can be fixed rate bonds or variable rate bonds. In case of fixed rate bonds, the interest rate of the bonds is determined during the issuing of the bond. This is advantegous when interest rates on new subsequent bonds are expected to decrease. Variable rate bonds’ interest rate changes as the rate of the LIBOR (London Interbank Offered Rate) changes. This is advantageous when interest rates are expected to rise following the issuing of the bonds.