Understanding Bonds

05-Aug-2007

There is a broad range of bonds available to investors ranging from very simple financial instruments to extremely complicated and complex bonds.  However, a simple way to understand the fundamentals associated with bonds is to look at their defining characteristics, mainly maturity, origination, structure, form and legal characteristics.

• "Maturity" can be thought of as the life of the bond, similar to the "term" of a loan.  Some bonds have maturity periods of less than a year while other have maturity periods of 15 years or more.  A typical bond maturity rate is around 10 years.

• "Origination" refers where the bond was issued.  A Domestic Bond is issued in the local currency, and it's offered to local investors.  Foreign Bonds are offered to other countries, outside of the issuers country, and are issues in the currency of country in which they are issued.  There are also some bounds, such as Eurobonds, that are marketed internationally, and they are issued in a currency that differs from the country in which they are issued.  

• The "Structure" of bonds can vary from fixed rate, floating rate, zero coupon and other more complex instruments including index-linked bonds and asset-backed bonds.   

• "Form and Legal Characteristics" refer to the rights associated with a bond.  Bonds may be registered as bearer bonds, and typically the rights associated with these bonds are fully transferable and negotiable.

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