What Is a Bond And What Are Its Features?

What is a bond? No, it's neither a living nor a non-living organism; neither plant nor animal nor mineral. When asked to define bond, even the veteran bondholders will go into lengthy descriptions of the types, nature and desirability of bonds as against other securities like stocks, options and futures.

Debt Securities

So, what is a bond, exactly? A bond is a debt security wherein the authorized issuer becomes the debtor to the bondholders who act as the creditors with the formal understanding that the debtor will pay the creditors with the principal plus the interest amounts on a definite maturity date. To simplify the definition, a bond is a loan wherein the issuer promises to pay the bondholders a certain amount at a certain date.

The authorized issuers come from both the public and private sectors. On one hand, the federal government through the Department of Treasury in the United States as well as the state and local governments can issue bonds to fund programs and projects particularly in infrastructure. Foreign governments also do the same.

On the other hand, corporations issue bonds to finance their present operations and future expansions. For example, a large corporation will issue bonds to raise capital for a new international venture instead of borrowing from banks or issuing more shares of stocks.

On a side note to the 'what is a bond' discussion, the bond market is often relegated to the sideline of the stock market mainly because of the latter's dominance in the consciousness of the general public. But did you know that the bond market is larger than the stock market? Yes, the global bond market is estimated to be worth $33 trillion while the stock market is approximately worth $20 trillion.

Bond Features

In order to define bond in a more comprehensive manner, it is necessary to name a few features of this debt security. These features include:

• Face Amount - This represents the amount that the issuer will pay interest on for the period stated. Take note that there are indexed bonds whose maturity value will differ from the principle-plus-interest value with the index being commodities, stocks and foreign exchange rate, among others. (Your query along the lines of "what is a bond" can be answered from the face amount alone.)
• Issue Price - This is the amount that investors pay when the bond is first issued. The issuer then receives the net proceeds (issue price less applicable issuance fees).
• Coupon Rate - This is the interest rate that the issuer will pay on the bond for the duration of the bond period. Take note that there are zero coupon bonds.
• Maturity Date - This is the specific time period when the bond will be paid in full. Depending on the type of bond, it can be anywhere from one year to thirty years although there are also perpetual bonds with no maturity dates.

Most importantly in the "what is a bond" discussion are the attractive features of the debt security. You will want to invest in bonds because of their low risks of loss since bond prices are not as volatile as stock prices. Plus, the taxes on bonds are also low with government-issued bonds actually being tax-free to a certain point.