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Financial Assets: Bonds
BONDS AND THEIR VALUATION
What is a bond?
It refers to a long-term debt instrument.
A long-term contract under which a borrower
agrees to make payments of interest and
principal on specific dates to the holders of the
bond.
Issued by corporations and government
agencies that are looking for long-term debt
capital.
Bonds can be classified into: Treasury bonds,
corporate bonds, municipal bonds, and foreign
bonds.
Treasury bonds
– issued by the government sometimes
referred to as government bonds
Corporate bonds
– issued by the corporations
Municipal bonds
– issued by the local government
Foreign bonds
– issued by the foreign government or
offered at a discount rate below their par values, hence
providing capital appreciation instead of interest income.
These bonds are called
zero coupon bonds
.
3. Maturity Date
A specified date on which the par value of a bond must
be repaid. Original maturity date refers to the number of
years to maturity at the time a bond is issued.
4. Call Provisions
It is a provision in a bond contract that gives the issuer
the right to redeem the bonds under specified terms
prior to the normal maturity date. Generally, the call
provision states that the issuer will must pay the
bondholder an amount greater than the part value if
they are called. The additional sum is called the
call
premium
, and is often equivalent to 1year interest.
5. Sinking fund provision
A provision in a bond contract that requires the issuer to
retire a portion of the bond issue each year. Failure to
meet the sinking fund provision constitutes a default
which may throw the company into bankruptcy. Thus,
sinking fund is a mandatory payment.
