Bond basics

Abstract

Bond and shares form part of the capital markets. Shares are equity capital while bonds are debt capital. So bonds are a form of debt, much as a bank loan is a form of debt. Unlike bank loans, however, bonds can be traded in a market. A bond is a debt capital market instrument issued by a borrower, who is then required to repay to the lender/investor the amount borrowed plus interest, over a specified period of time. Bonds are also known as fixed income instruments, or fixed interest instruments in the sterling markets. Usually bonds are considered to be those debt securities with terms to maturity of over one year. Debt issued with a maturity of less than one year is considered to be money market debt. There are many different types of bonds that can be issued. The most common bond is the conventional (or plain vanilla or bullet) bond. This is a bond paying regular (annual or semiannual) interest at a fixed rate over a fixed period to maturity or redemption, with the return of principal (the par or nominal value of the bond) on the maturity date. All other bonds are variations on this.