What are Bonds?



BONDS

  • A bond is a formal unconditional promise, made under seal, to pay a specified sum of money at a determinable future date, and to make periodic interest payment at a stated rate until the principal sum is paid.
  • A bond is a contract of debt whereby one party called issuer borrows funds from another party called the investor.
  • A bond is evidence by a certificate and the contractual agreement between the issuer and the investor is contained in a document known as “bond indenture”.

Features of bond issue

  1. A bond indenture or deed of trust is the document which shows in detail the terms of the loan and the rights and duties of the borrower and other parties to the contract.
  2. Bond certificates are used. Each bond certificate represents a portion of the total loan.
  3. If property is pledged as security for the loan, a trustee is named to hold title to the representative of the bondholders and is usually a bank or trust entity.
  4. A bank or trust entity is usually appointed as registrar or disbursing agent. The borrower deposits interest and principal payments with the disbursing agent, who then distributes the funds to the bondholders.



Contents of bond indenture

The bond indenture is the contract between the bondholders and the borrower or issuing entity.

  1. Characteristics of the bonds
  2. Maturity date and provision for repayment
  3. Period of grace allowed to issuing entity
  4. Establishment of a sinking fund and the periodic deposit therein.
  5. Deposit to cover interest payments
  6. Provision affecting mortgaged property, such as taxes, insurance coverage, collection of interest or dividends on collateral
  7. Access to corporate books and records of trustee
  8. Certification of bonds by trustee
  9. Required debt to equity ratio
  10. Minimum working capital to be maintained, if any

 Types of bonds

 The most common distinguishing characteristic and types of bonds are:

 Terms and serial bonds

  •  Terms bonds are bonds with a single date of maturity.
  • Serial bonds are bonds with a series of maturity dates instead of a single one.

 Secured and unsecured bonds

  •  Mortgaged bonds are bonds secured by a mortgaged on real properties. These bonds may be first mortgage bonds or bonds with senior claims on entity assets, or second mortgage bonds or bonds with subordinated claims on entity assets.
  • Collateral trust bonds are bonds secured by stocks and bonds of other corporation.
  • Debenture bonds are bonds without collateral security.

 Registered and bearer bonds

  •  Registered bonds require the registration of the name of the bondholders on the book of the corporation.
  • Coupon or bearer bonds are unregistered bonds in the sense that the name of the bondholder is not recorded on the entity books.

Other types of bonds

  • Convertible bonds are bonds that can be exchange for shares of the issuing entity.
  • Callable bonds are bonds which may be called in for redemption prior to the maturity date.
  • Guaranteed bonds are bonds issued whereby another party promises to make payment if the borrower fails to do so.
  • Junk bonds are high risk, high-yield bonds issued by entities that are heavily indebted or otherwise in weak financial condition.