Bonds

• Bonds are debt notes issued to the public/investors.
  • As a bond holder you receive a premium (coupon rate – think interest rate) for lending your money to a company or government.
  • At the end of the bond’s life you expect to receive your principle (initial investment back).
• Companies and governments that issue bonds receive a credit rating.
  • Based on the credit rating, the company/government will have to pay a higher or lower premium to attract investors.
    • The higher the rating a company/government has, the lower the rate that must be offered.
    • Ratings go from AAA to D.
    • Bonds with lower ratings have a higher chance of defaulting (not paying you what you were stated)
• The length of the bond’s life also impacts the coupon rate (premium) that must be offered to attract investors.
  • Rule of thumb – the longer the maturity date the greater the premium offered compared to bonds with lesser maturity dates.