Stocks Bonds
Bond is a legal or credit instrument that promises to pay a sum of money at a designated time under certain conditions.
II. Bond basics
Bonds are a core element of any financial plan to invest and grow wealth. If you are just beginning to consider investing in bonds, use this section as a resource to educate yourself on all the stocks bonds basics. In this section you will learn:
* What a bond is
* Why financial professionals recommend that you have bonds in your diversified investment portfolio
* Key factors to consider when evaluating a potential bond investment, and
* Fundamental strategies for investing in bonds.
III. Conditional bonds
In law, the term bond refers to an agreement that guarantees payment if a specified action or event fails to take place; this is generally known as a conditional bond. A bail bond, for instance, is forfeited if the prisoner does not appear at the proper time.
Many businesses and service organizations make use of fidelity bonds; their employees are bonded against loss due to dishonesty during the performance of their jobs. Bank workers with access to funds, and messengers who deliver valuables are examples of bonded employees.
A performance bond is designed to make certain that an obligation will be carried out. It is frequently used in the construction industry. An example is a bond that provides for the payment of a penalty if a building contractor does not complete work on a structure by a stated date. In matters involving large sums of money it is customary not to rely on the personal bond of the obligated party but to require that individual to procure a bond issued by a surety company.
Bonds are often required when litigation takes place. The losing party in a civil suit, for instance, may be called upon to furnish a surety stocks bonds to guarantee a court-awarded payment.
IV. Investment bonds
Investment bonds, used in finance, are written instruments that state that the maker is indebted to the holder and will pay interest and principal at given times. Such bonds are issued by corporations and governmental bodies. They are sold to investors through banks or brokers, and the proceeds of the sale are made available to the debtor. The investor may hold the bond for the interest payments or may sell it freely. Bonds that are issued by a private company usually are secured by a mortgage on the company's property or by other substantial protections.
Bonds issued by a sovereign nation rely for their security entirely upon the buyer's confidence in the taxing power and stability of the issuing government. Municipal bonds include bonds of other political divisions, such as counties, cities, towns, and districts. These bonds are issued either as the direct obligation of the entire issuing body or as special assessment bonds, which are to be withdrawn from circulation by the levy of special taxes on the property to be improved.
V. Types of bonds
To invest in bonds, need to decide what kinds of bond investments are right. Most people dont realize it, but the bond market offers investors a lot more choices than the stock market.
Depending on your goals, tax situation and risk tolerance, chosen from municipal, government, corporate, mortgage-backed or asset-backed securities and international bonds. Within each broad bond market sector you will find securities with different issuers, credit ratings, coupon rates, maturities, yields and other features. Each one offers its own balance of risk and reward.
1. The price a bond is sold for is called the par value of the bond. Bonds have a fixed interest rate set at the time that a bond is bought. They are called fixed income securities. A security is something like a bond or a stock certificate that proves that you own something. Bonds are less risky than stocks, because the price of a stock fluctuates, but the price of a bond does not.
2. The amount of time between when a bond is issued and when it is paid back is called the term of the bond. Short-term bonds have a term of under a year, while long-term bonds have a term of 30 years or more. Bonds with terms falling between these two extremes are called intermediate-term bonds. Bonds that have a longer term tie up your money for a longer period of time, so they usually have higher interest rates to compensate for this risk
3. Zero interest convertible bonds: As the very name suggests, these instruments carry no interest till the time of conversion. These instruments are converted into equity shares after a period of time.
4. Deep Discount bonds: There will be no interest payments in the case of deep discount bonds also. Hence, they are sold at a large discount to their nominal value. This stocks bonds could be gifted to any person.
5. Index linked guilt bonds: These are instruments having a fixed maturity. Their maturity value is linked to the index prevailing as on the date of maturity. Hence, they are inflation free instruments.
6. Option bonds: These bonds may be cumulative or non-cumulative as per the option of the holder of the bonds. In the case of cumulative bonds, interest is accumulated and is payable only on maturity. But, in the case of non-cumulative bond, the interest is paid periodically.
7. Convertible bonds: A convertible bond as one which can be converted into equity shares at a pre-determined timing either fully or partially. There are compulsory convertible bonds which provide for conversion within 18 months of their issue. There are optionally convertible bonds which provide for conversion within 36 months. There are also bonds which provide for conversion after 36 months and they carry call and put features.
8. Easy exit bond: As the name indicates, this bond enables the small investors to encash the bond at any time after 18 months of its issue and hereby paving a way for an easy exit. It has a maturity period of 10 years with a call option with a face value.
9. Retirement bond: This type of bond enables an investor to get an assured monthly income for a fixed period after the expiry of the wait period chosen by him. No payment will be made during the wait period. The longer the wait period, the higher will be the monthly income. Besides these, the investor will also get a lump sum amount on maturity.
10. Regular income bond: This bond offers an attractive rate of interest payable half yearly with the facility of early redemption. The investor is assured of regular and fixed income.
11. Infrastructure bond: It is a kind of debt instrument issued with a view to giving tax shelter to investors. The resources raised through this bond will be used for promoting investment in the field of certain infrastructure industries. This bond will also be listed in important stock exchanges.
12. Carrot and stick bonds: Carrot bonds have a low conversion premium to encourage early conversion and sticks allow the issuer to call the bond at a specified premium if the common stock is trading at a specified percentage above the strike price.
13. Convertible bonds with a premium put: These are bonds issued at face value with a put, which means that the bondholder can redeem the bonds for more than their face value.
14. Dual currency bond: Bonds that are denominated and pay interest in one currency and are redeemable in another currency come under this category. They facilitate interest rate arbitrage between two markets.
15. European Currency Unit Bonds (ECU): These bonds are denominated in a basket of currencies of the 10 countries that constitute the European community. They pay principal and interest in ECUs or in any of the 10 currencies at the option of the holder.
16. Yankee bonds: If stocks bonds are raised in U. S. A. , they are called Yankee bonds and if they are raised in Japan, they are called Samurai bonds.
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