A bond is a debt instrument where the issuer has to pay the nominal value to the holders of the bonds at the maturity of the contract with interest. Probably a bond also contain other information and/or restrictions depending on the behavior of the issuer. Bonds are generally issued for a specified period of time (maturity), which usually is more than a year and can reach in maturity the 30 years. Debt securities with a maturity less than one year are promissory notes or bills of exchange, and are considered money market instruments.
A bond is simply a loan but in the form of security, though terminology used is rather different. The issuer (e.g. a bank) is the debtor, the holder of bonds (e.g. a natural or legal person) is the lender and the coupon is the interest. The bonds allow the issuer to finance long term investments with external funds. Let’s look at some of the most basic kinds of bonds:
The government bond (treasury bond) is the most common case of a bond. Bonds of this type are found in many countries. Issued for relatively large amounts, have an outstanding credit value and are of high liquidity. It’s a way for governments to cover some of the borrowing needs. As a benchmark for pricing of all other publications.
The market of U.S. government bonds is the largest in the world, benchmark in international markets (T-bonds, T-bills, T-notes). Products of this market are treasury bills, bonds with a maturity of 2 to 10 years (treasury notes) and bonds with a maturity of more than 10 years (treasury bonds). Popular and best known are those of 30-year old bonds. Other major government bond markets are those of Japan, Germany and the UK.
A business bond (corporate bond) intended to finance corporate debt. It is natural that the quality is not like the one of the government bonds. The credit value and marketability of corporate bond depends on the creditworthiness of the issuer. Such bonds usually issued by industrial companies, utilities or banks and are at higher risk than government bonds.
The municipal bonds issued by the various levels of government as prefectures and municipalities, and generally considered good quality and liquidity. Municipal bonds are popular and known great developed in the market of US.
The transnational bonds (supranational bond) issued by international organizations that have the best possible rating in terms of risk (triple A or AAA). Such organizations are the World Bank and the European Investment Bank. They have publications in all major currencies.
MUTUAL FUNDS OF BONDS
Also, the bond market has a number of mutual funds that the main composition comprises a mixture of bonds (government, business, municipal, etc). Thus, the holder of the bond shares automatically spreads the capital in more than one bond, thus reducing the risk of losing his money.
Better known as foreign or/and global bonds (international bonds). These bonds issued in other currency than the local one. For example, the investor might live in a European Union country where the currency is the euro but invests money to a bond that its base currency is the dollar. International bonds have the advantage of trading in more than one country at the same price.
Structured bonds are a special variant of variable income bonds. It is constructed (structured) so that the holders to reduce the investment risk. The capital of structured bonds is guaranteed at maturity while expires. Only the yield (interest) is variable and depends on the market and the specific structure of each such bond.