Bonds
Also called: Bond · Topic: Financial Markets, Instruments, Insurance and Pensions · NCERT: Class 12, Ch 3 "Money and Banking"
Meaning
Bonds are tradable papers that governments or firms issue to borrow money. The issuer promises a stream of future payments over a set period (the maturity) against a face value, which is the amount repaid at the end. A bond's price in the market equals the present value of these future payments, meaning what they are worth today. So bond prices fall when market interest rates rise, and rise when rates fall.
Example
In the NCERT example, a firm issues a bond with face value Rs 100, maturity 2 years and a 10% coupon (yearly interest). It pays Rs 10 after year 1 and Rs 110 (Rs 10 interest + Rs 100 principal) after year 2. At a 5% market rate, this bond is worth about Rs 109.29. At 6%, it is worth about Rs 107.33.
Don't confuse with
- Equity shares: a bond is a loan, and the holder is a lender who gets fixed payments. A share is ownership, and the holder gets a dividend only if the company chooses to pay one.
Related concepts
- Coupon rate
- Present value
- Bond price and interest rate inverse relation
- Capital gain
- Zero-coupon bond
- Floating rate bond
- Mark-to-market
- Yield curve
- Inverted yield curve
- Credit rating