Bond, Securities and Equities Valuation

How do you define a Bond?

Bond is a security that pays a given amount of interest to the investor, time after time, until it is finally retired by the issuing body. A bond has a face value, this value is usually $1,000 per bond in the U.S. The bond almost always has a stated maturity, which is the time company or issuing body is obligated to pay the bondholder the face value of the instrument. Then there is the coupon rate or nominal annual rate of interest which is stated on the bond's face. For example, if the coupon rate is 14% on a $1,000 face value bond the company or issuing body pays the holder $140 each year until the bond matures.

Bonds with Call Price

Usually bonds are held by the bond holder till its maturity date, yet the issuing company may sometimes issue bonds with call price which the issuer can call back for redemption and reissue it at a lower interest rate thus saving themselves interest payable at the older higher rate. A bond's market price fluctuates with the ups and downs in the interest rate, when interest rate are set higher the bond prices go down and the bond prices take a hike when interest rates are lowered.

Thus a company such as General Motors may issue Callable bonds with a par value of $1000 at a coupon rate of 10% to be held for 10 years. With 10% coupon rate per annum, GM would have to pay an interest amount of $100 each year for a single issue of a bond. Now say at the beginning of Year 2, the interest rate are cut in half to 5% thus driving up the price of the bond at the same time. It will best suit GM to recall the bonds and reissue them at a coupon rate of 5% thus saving itself $50 on each issue of interest payment.

How to value a Bond?

In valuating a bond or any other security, we are mainly concerned with discounting, or capitalizing, the cash flow stream that the security holder would receive over the life of the instrument. The terms of a bond establish a legally binding payment pattern at the time the bond is originally issued. This pattern consists of the payment of a stated amount of interest over a given number of years coupled with final payment, when the bond matures, equal to the bond's face value.

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What are three common types of Bonds?

Who issues bonds?