While equities are the most visible asset class, the bonds are the most diverse. Typical company has one, few firms have a couple of equities share classes. The most notable examples are tech firms such as Alphabet and Facebook having the share classes that grant different voting power.

For bonds, many firms would have a broad range of them maturing at different times in the future. You may have short 3–5-year bonds as well as a wide range of instrument maturing in 5-10 and even 20-30 years. The broader the range of instruments that company creates the higher complexity to price them and it all leads to way lower markets liquidity.

Explaining the bond as an instrument is much simpler as we all have a direct example in our everyday lives – it is like any loan. Essentially, the company borrows a sum of money placing its requirement for debt into the market and then repays it based on a specific schedule and paying (or not paying in case of zero-coupon bonds) coupon (interest) along the way.

Such borrowers, though, could be also other than company entities and the sizeable chunk of outstanding bonds is made up by governments, the most significant being the US Government’s treasury bonds.

The bond instruments usually have the following characteristics:

• Face Value. This is the price of the bond at its par value. Typically, it is $1,000, however, it can also be much large for the government bonds.
• Coupon. The amount of money that the issuer pays in a set time frame. The zero-coupon bonds do not have any coupons.
• Coupon frequency. The time when the coupons are paid. Can be monthly, quarterly, semi-annually, or annually.
• Maturity. The time over which the bond is repaid. It typically ranges between 1 and 30 years. Longer maturities typically present a greater risk for the investors.
• Bond Yield. The return investor realises on the bonds. There are multiple measures that are used for evaluation of the different bond types.
• Issuer. That is the entity issuing the bond, which can either be corporation or government.
• Credit Rating. The bond rating that is issued by one the large credit rating agencies such as Moody’s, Standard & Poor’s (“S&P”). The higher ratings represent the greater probability of the company to maintain its business operation under poor economic conditions.

As a rule of thumb, the bonds are less risky instruments. In case of the company’s failure, the bondholders are repaid first ahead of the equity holders, hence the probability of recovering a part of the investment is significantly higher. Saying that, occasionally, the bonds can experience significant price changes during their holding period as their returns are linked to the interest rates.

<< Back to the main topic

Please note, none of the information on this blog represents the opinion of my employer and all information does not represent a financial advice.