BONDS
Bonds are instruments countries
and corporations use to raise capital to finance their activities. Some bonds
have short term maturities whilst others have long term maturities. Short term
bonds are normally called notes. Investors
who buy bonds are promised fixed interest payment throughout the life of the
bond. However, some bonds do not pay interest. They are called zero coupon bonds.
These bonds are usually sold at deep discount (at a lower price). At the end of
the maturity period, the investor is paid the actual value of the bond. So the
difference between the amount the investor paid for the bond and the amount he
receives is the investor’s gain. Example, let say a bond has a face value of
$1000 dollars but is sold in the market at $800.This bond does not pay any
interest. At the maturity period, investors will be paid $1000 dollars even
though they bought the bond for $100 dollars. So the gain from this bond is
$1000-$800=$200.
The interest on bonds is called
the coupon rate
Types of bonds
1. Domestic bonds: These are bonds issued
in the domestic market by domestic institution. For instance, if the U.S government
issues a bond in the U.S market, the bond is known as domestic bond.
2. International bonds: They are bonds
traded outside the issuer’s country. For example a bond issued by a US company
but is traded in the Japanese market is an international bond.
3. Foreign bonds: They are bonds issued by
a foreign entity in a domestic market and denominated in the currency of the
domestic market. For example, a Chinese company issues a bond in the U.S but
the bond is denominated in dollars.
4. Eurobonds: They are bonds issued by a
foreign entity in a domestic market but the bond is not denominated in the
domestic currency. Example, Nigeria issue a bond in Ghana but the bond is
denominated in dollars.
5. Global bonds: They are bonds that are
issued in several markets at the same time.
6. Corporate bonds: They are bonds issued
by corporations (companies).
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