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Bonds

Bonds are financial instruments issued by government or private entities such as corporations. Bonds have a par or face value which is the sum that the bond holder will receive from the bond issuer when the bond matures Bonds typically pay fixed coupons over their life term but a zero coupon bond pays no dividends but will typically trade at a value lower than its par value and would be sold at a lower cost than par when issued. The coupon rate of a bond is the rate it returns each year. The yield on a bond is the total that a bond will return over its life. Publicly traded bonds are traded in bond markets and the market prices of bonds vary according to interest rates. When the base rate of interest goes up bond prices go down because the stream of dividend payments bonds offer are worth less than what investors can earn elsewhere. Over the life of a bond it will trade either at par at a premium i.e. higher than par or at a discount i.e. lower than its par value.

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