Assignment 1:3 Definitions

Assignment 1-3 Definitions

Term: Bond

Introduction:

I am writing this post in order to define the term “bond”, most commonly used in the field of economics. The definition will be written to address a non-technical audience. I will write as an economics professor explaining the term “bond” to a student for the first time. I will provide three types of definitions: parenthetical, sentence, and expanded. The information used to define the term will be from my personal knowledge as an economics student as well as from online websites.

Parenthetical Definition:

Loans issued by corporations and governments that pay a fixed interest rate.

Sentence Definition: 

Bonds are long/short term loans issued by corporations and governments that traditionally pay a fixed interest rate. Corporations and governments use bonds to borrow money from investors (people like us) to raise funds for things like building roads or buying equipment. Bonds are regarded as low-risk investments as governments and good credit-rated companies are highly unlikely to miss their promised payments of a fixed amount.

Expanded Definition: 

Bonds are a type of fixed income that borrowers pay the investors at a specified date in future and at a fixed interest rate. Although, sometimes before the bond is due, investors are liable to receive fixed payments at regular intervals. There are two main purposes of issuing a bond. Corporations and governments issue bonds to raise funds for their projects and common people like us lend a certain amount of money to them in order to receive a higher amount later in the future. Bonds are the most common and easiest form of low-risk investment. They are easy to issue publicly or over the counter by almost anyone and certain to be paid as it is highly unlikely that the government or a company with a high credit rating would go bankrupt.

Figure 1: The process of issuing a bond 

Source: HSBC Global Asset Management Hongkong “Fixed income 101”

Basis characteristics of a bond-

• Face value: is the money amount the bond will be worth at final date of maturity.
• Coupon rate: is the rate of interest the bond issuer will pay on the face value of the bond. For example, 10% coupon rate means that bondholders will receive 10% x $1000 face value = $100 every year.
• Coupon dates: are the dates on which the bond issuer will make interest payments. Payments can be made in any specified interval.
• Maturity date: is the date on which the bond issuer will pay the bondholder the face value of the bond.
• The issue price: is the price at which the bond is sold.

Example of a bond- U.S. Treasury bond, also referred to as T-bills. These are the infamous American government bonds that are issued to raise funds for governmental purposes. These are very low risk and high-value bonds as expected by the current status of America in the global economy.

Sources

Hayes, Adam. “Bond.” Investopedia, Investopedia, 10 Apr. 2020, www.investopedia.com/terms/b/bond.asp.

The Economist, The Economist Newspaper, www.economist.com/economics-a-to-z/b#node-21529458.

“Fixed Income 101.” HSBC Global Asset Management Hongkong, www.assetmanagement.hsbc.com.hk/en/intermediary/investor-resources/investment-academy/fixed-income-101#openTab=0.