The concept of Bond: pricing and yield

Bond 

Whenever the company wants to raise money they have two options:

1. Equity capital market(Stock market).

2. Debt Market (Fixed income market).

A bond is a debt instrument requiring a issuer(borrower or a debtor) to repay the lenders/ investors money that they borrowed ,with interest over specific period of time.

Bond doesn't give the ownership of the company.

Who Issue Bonds:

As there are 4 person who can only authorized to issue bonds:

1. Government:                                                             Government issues bonds when they are in budget deficit. Which simply means they have collected less tax as compared to their spending.

2. Corporate:                                                              Many large companies to borrow money to fund their operation and growths.

3. Regions and municipalities:                                                        Whenever a local region municipalities need some money then they can issue bonds to raise funds.

4. Super national :                                                              The world bank raises money for reconstruction and development projects in various countries.

Bond Certificate:

Company issues bond certificate to the investor or the lender.

• This is one of the Bond certificate taken to show how the bond certificate looks like

Yield:

Yield simply means the amount of money that the investor or the lender receives every year or in quarter or in half yearly or monthly as in form of interest.

Yield Curve:

It is s a graphical representation of the borrowing rates for a range of maturity.

The upward slope means that long term investments pay a higher return than short term investments.

Credit Ratings:

The company are allotted a credit rating which shows the ability of the company to pay the amount that is invested by the lender or investor with interest.

The credit rating starts from AAA+ to D.

Where AAA+ id the best and D is the worst.

High yield/ Junk Bonds:

High yield bond means the company pays high rate of interest as compared to other but its not guaranteed that you will also get the principal amount that you lend to that company. but it depends on the companies ability to pay the amount of money that you lends.

Price of a bond:

There are 2 different prices for a bond

1. The price that quotes i.e clean price
2. The price that is paid i.e dirty price

The difference between these two prices is called as a interest which accrues each day which is periodically paid to bond holders. The dirty price includes accrued interest. The clean price does not include the accrued interest.

Time value of money, Discounted factors, compound interest and Cash flows are concepts used to calculate the price of the bond.

The price of the bonds is the sum of the present values of its cash flows calculated using DCF( Discounted Cash Flows)

As yield rise bond prices falls.

There is a inverse relationship between Yield and Price.

This is all about Bonds in short.