Financial instrument:-Bond

For raising money from the market companies or Organisations use different types of financial instruments, one of them is bonds,

A bond is a contractual document between a company and investors, In the Finance market it’s called a Bond Indenture. Any company or organisation that wants to raise money from bonds, requires a Trustee as a mediator between the investor and the company/organisation. Also, they require an agency which would provide ratings for the bond or any financial instrument, called a credit rating agency e.g S&P, Moody, ICRA etc...

> Bond Indenture is a set’s of the legal Obligation, Covenants & promises of the issuer and the rights of the bondholder.

> A bond covenant is a legally binding agreement that restricts the behaviour of the firm borrowing money.?This is generally done to ensure that the borrowing firm does not continue to recklessly borrow more and more money until it goes bankrupt.?

> Trustees act in a fiduciary capacity on behalf of the bondholders. The trustee will monitor the activities of the Bond issuer to make sure that the issuer abides by the indenture’s covenants. Such covenants include negative or restrictive, Positive & Financial.

> A credit rating agency is?a company that assigns credit ratings, which rate a debtor's/ Financial Instrument's ability to pay back debt by making timely principal and interest payments and the likelihood of default.

Based on maturities term bonds are classified into three groups as follows.

1)?Short team bond which will mature within 5 years.

2)?Medium-term bond which has maturities from 5 years to 12 years.

3)?Long-term bond which has maturities greater than 12 years.

Further classification of bonds is based on interest payment.

1)?Fixed interest rate set for the entire life of the issue.

2)?Floating rate also known as variable rate bond. Generally, the interest is linked to the market reference rate such as SOFR plus a fixed spread.

3)?Zero-coupon pay the face value or principal at maturity. Generally, the Bondholder earns a return by purchasing the bond at a discount to face value and receives the face value at maturity.

There are various types of bonds through which companies/organisations can raise money.

1)?Mortgage bonds have supporting collateral from an issuer that can be sold and pay off the default.

2)?Collateral trust bond backed by the financial obligations that the company owns such as stock, Notes, Bonds etc..

3)?ETCs Equipment Trust Certificates are a variation of a mortgage bond where a particular equipment underlies the bond. The arrangement is that the Bond Issuer doesn’t hold the Title (Ownership/Purchase) of Equipment, Instead the trustee purchases the equipment and leases it to the bond issuer and rent is passed through to the bondholder. The title of equipment will be transferred to the bond issuer once full payment of the debt is done. This type of bond is used in the aircraft/Aviation industry.

4)?Debentures are the unsecured bond ( no collateral). Many corporate bonds are debentures and pay higher interest rates for that reason they rank below mortgage bonds and ETC’s.

5)?Subordinated debenture bonds are a type of debt security issued by an issuer that ranks lower in priority for repayment in case of bankruptcy or liquidation compared to other forms of debt hence issuer offers a higher interest rate.

Bonds are traded publicly in the over-the-counter (OTC) market as opposed to exchanges, Where dealers exit the bond market to buy and sell the bond and earn profit through the bid-ask spread.