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Basic Information Handout

Basic Information Handout

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Published by: accesstariq on Dec 25, 2009
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12/10/2012

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Bonds
Basic Information Handout
By-Tariq Mumtaz
 
Definitions
 
 A bond is simply a loan in the form of a security with different terminology: The issuer is equivalent to the borrower, the bondholder to the lender, and the coupon to the interest.Bonds enable the issuer to finance long-term investments with external funds. Bonds and stocks are both securities, but the major difference between the two is that stockholders are the owners of the company (i.e.,they have an equity stake), whereas bondholders are lenders to the issuing company.
 As per “wikipedia.org” 
 
 A debt instrument issued for a period of more than one year with the purpose of raising capital by borrowing.The Federal government, states, cities, corporations, and many other types of institutions sell bonds.Generally, a bond is a promise to repay the principal along with interest (coupons) on a specified date (maturity).
 As per “investorwords.com” 
 
 A debt investment in which an investor loans money to an entity (corporate or governmental) that borrowsthe funds for a defined period of time at a fixed interest rate. Companies, municipalities, states and U.S. andforeign governments to finance a variety of projects and activities use bonds.Two features of a bond - credit quality and duration - are the principal determinants of a bond's interest rate.Bond maturities range from a 90-day Treasury bill to a 30-year government bond. Corporate and municipalsare typically in the three to 10-year range.
 As per “investopedia.com” 
When it comes down to it, a bond is simply acontract between a lender and a borrower bywhich the borrower promises to repay a loanwith interest. However, bonds can take on manyadditional features and/or options that cancomplicate the way in which prices and yieldsare calculated. The classification of a bonddepends on its type of issuer, priority, couponrate and redemption features.
1) Bond Issuers
 As the major determiner of a bond's creditquality, the issuer is one of the most importantcharacteristics of a bond. There are significantdifferences between bonds issued bycorporations and those issued by a stategovernment/municipality or nationalgovernment. In general, securities issued by thefederal government have the lowest risk of default while corporate bonds are consideredriskier ventures.
 2) CUSIP Number
CUSIP stands for Committee on UniformSecurities Identification Procedures. Formed in1962, this committee developed a system thatidentifies securities, specifically U.S. andCanadian registered stocks, and U.S.government and municipal bonds.
 
The CUSIP number consists of a combination of nine characters, both letters and numbers, which act as asort of DNA for the security - uniquely identifying the company or issuer and the type of security. The firstsix characters identify the issuer and are assigned in an alphabetical fashion; the seventh and eighthcharacters (which can be alphabetical or numerical) identify the type of issue; and the last digit is used as acheck digit.
 3) Par Value
Par value, in finance and accounting, means stated value or face value. In the U.S. bond markets, a bond isworth its par value when the price is equal to the face value. A Treasury note is denominated in units of $1,000. The par values for different fixed-income products will vary. Bonds generally have a par value of $1,000, while most money market instruments have higher par values. A par value of 100.00 for a note or bond means only that the note or bond is selling for the face value paidupon maturity of the note or bond. It can (and does) have different absolute values per Note or Bonddepending on the conventions of the particular market and country in which such par value is quoted
 4) Annual Interest Rate or Coupon
 A coupon is the stated interest rate for a bond. Most bonds have a fixed coupon that does not change duringthe life of the bond. Most bonds have two coupon payments per year. For example, a bond with a 5.0%coupon pays $25 twice per year, for total interest of $50, which is 5.0% of the face value of the bond (almostall bonds have a face value of $1,000).
 5) Maturity Date
The maturity date of a bond is the date on which the bond will be repaid. Note that many bonds havefeatures such as puts and calls that can cause the principal to be repaid on an earlier date.
6) First Coupon Date
Bonds typically pay interest twice per year on coupon payment dates. The first coupon date is the date onwhich the very first interest payment is made for a bond. It is relevant because bonds often have a longer orshorter than normal first payment period. When the first coupon payment has been made, the bond willlikely pay every 6 months thereafter.
7) Coupon Payment Frequency
The pay frequency refers to the frequency that the bond pays interest. The most common pay frequency issemi-annually (twice per year), but bonds can also pay interest monthly, quarterly, annually, or at maturity.
8) Trustee & Paying Agent
 An agent who makes dividend payments to stockholders or principal and interest payments to bondholderson behalf of the issuer of those stocks or bonds. Also known as a "disbursing agent." A bank is usually thepaying agent designated to make dividend, coupon, and principal payments to the security holder on behalf of the issuer.

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