A debt instrument that obligates the issuer to pay to the bondholder the principal plus interest.
Bonds are issued by the government or other public authorities, credit institutions, and companies, and are sold through banks. They enable the issuer to finance long-term investments with external funds. The total volume of a bond issue is divided into smaller amounts of at least 50. The most important features of a bond are its maturity date, the coupon (interest rate), and whether the interest rate is fixed or floating. The rights vested in a bond are stipulated by law, but are typically supplemented with additional terms and conditions.
Bonds can fall into one of the three following categories:
- fixed-rate bonds (interest rate remains constant throughout the life of the bond)
- floating-rate bonds (variable interest rate that is tied to a benchmark such as a money market index)
- zero-coupon bonds (bond that does not bear interest as such, but is sold at a substantial discount from its face value; the bondholder receives the full face value at maturity).
