Bond and Interest

Bond and Interest

Introduction

By definition, Bond is a debt security which gives explicit or embedded interest according to some specific schedule. Indeed, when an investor buys a bond, it actually lends a sum of money to the issuer of the bond and it incurs a debt. Therefore, the issuer (or seller of the obligation) is a borrower and the investor (or buyer of the bond) is the lender. In other words, Bonds are debt investments. When you buy a bond, you lend money, capital investing, the issuer need for cash. Most of these loans last for a specified period of time, called the term of the bond, which can vary from less than one year to 40 years or more(Florian ,Harper,2008).

Discussion

Types of Bonds

There are different types of bonds available, but even the variations in different types of bonds still does not affect its status of fixed income security(Tuckman ,2002).

The fixed rate bonds

These are the most common obligations, the EDF is one example. Each bond pays a coupon regular, known in advance (usually every year, but there are also quarterly coupon bonds), and found their capital at maturity. They allow to know exactly how much we receive, and when one of our investment will be refunded. They are sensitive to interest rates: when rates rise, investors prefer bonds newly issued and secondary market is trading at a discount.

When rates go down, they are increasingly popular, and the secondary market pays a premium on these bonds.For the same reasons, they are sensitive to inflation. When inflation rises, nominal rates seem less interesting, and the obligations fall on the secondary market. However, low inflation is favorable.

The floating rate notes

Interest payments are not known in advance: they are determined before (sometimes after) each interest period, by the observation of a market rate, possibly by ...