What is the Bonds Definition? A bond is a security that pays a fixed interest rate. The price of a bond is derived from the par value, which is the amount that will be paid when the bond matures. This amount is known as the face value or par value nominal. Interest rates on bonds are quoted as a percentage of the par value. If the issuer of the securities defaults on its obligations, the bondholder will only receive a partial or no payment at all. In contrast, bonds that are priced above or below par are referred to as having higher interest rates.
There are various types of bonds, including zero coupon and index. The first two are unsecured and pay no interest during their life. The latter has no collateral to offer, and is also known as debtentures. The maturity date is the date when the issuer will repay the investor’s principal. Municipal bonds are issued by local or state governments, while Treasury bonds are issued by the U.S. Treasury. The duration and credit ratings of a bond are the most important considerations for determining its value and suitability for investment.
Another important factor is the quality of a company issuing a bond. A bond’s market price reflects its future interest payments and principal, and the interest rate of the bond is known as the yield to maturity. The interest rate on a bond is usually close to the current market interest rate, so investors who are willing to wait a few years to repurchase the bond can potentially make a profit. The same goes for a corporate bond.