What are bonds ?!

Debt securities represent a contractual obligation of the issuer to the holder of the debt security.

A bond is governed by a legal contract between the bond issuer and the bondholders. In the event that the issuer does not meet the contractual obligations and make the promised payments, the bondholders typically have legal recourse. The par value is the amount that will be paid by the issuer to the bondholders at maturity to retire the bonds. The coupon rate is the promised interest rate on the bond. Coupon payments are linked to the bond's par value and the bond's coupon rate. The bond contract gives bondholders the right to take legal action if the issuer fails to make the promised payments or fails to satisfy other terms specified in the contract. If the bond issuer fails to make the promised payments, which is referred to as default, the debtholders typically have legal recourse to recover the promised payments. The par value of a bond plus missed interest payments represents the maximum amount a bondholder is entitled to receive upon liquidation of a company, assuming there are sufficient assets to cover the claim.

A fixed-rate bond has a finite life that ends on the bond's maturity date, offers a coupon rate that does not change over the life of the bond, and has a par value that does not change. If interest rates in the market change or the issuer's creditworthiness changes over the life of the bond, the coupon the issuer is required to pay does not change. Fixed-rate bonds pay fixed periodic coupon payments during the life of the bond and a final par value payment at maturity.

The coupon rate of a floating-rate bond is usually linked to a reference rate. The calculation of the floating rate reflects the reference rate and the riskiness of the issuer at the time of issue. The floating rate is equal to the reference rate plus a percentage that depends on the borrower's creditworthiness and the bond's features. The percentage paid above the reference rate is called the spread and usually remains constant over the life of the bond. Floating-rate coupon payments are paid in arrears that is, at the end of the period on the basis of the level of the reference rate set at the beginning of the period. On a payment date, the coupon rate is set for the next period to reflect the current level of the reference rate plus the stated spread.

For most inflation-linked bonds , the par value not the coupon rate of the bond is adjusted at each payment date to reflect changes in inflation (which is usually measured via a consumer price index).

Zero-coupon bonds are issued at a discount to the bond's par value that is, at an issue price that is lower than the par value.

Callable Bonds A call provision gives the issuer the right to buy back the bond issue prior to the maturity date. The inclusion of the call provision allows the company to buy back the bonds, presumably using proceeds from the issuance of new bonds at a lower interest rate. It is important to note that the call provision is a benefit to the issuer and is an adverse provision from the perspective of bondholders. In other words, the call provision is an advantage to the issuer and a disadvantage to the bondholder.

Putable Bonds A put provision gives the bondholder the right to sell the bond back to the issuer prior to the maturity date. A putable bond gives bondholders with the right to sell their bonds to the issuer prior to the maturity date at a pre-specified price referred to as the put price. It is important to note that, in contrast to call provisions, put provisions are a right of the bondholder and not the issuer. The inclusion of a put provision is an advantage to the bondholder and a disadvantage to the issuer. When a bondholder exercises the put provision, the pre-specified put price at which bonds are sold back to the issuer is typically the bond's par value. Securitisation refers to the creation and issuance of new debt securities, called asset- backed securities, that are backed by a pool of other debt securities.

Slahdji Mohamed Oussalem