Series 79 Top-off: Characteristics Of Bonds

Taken from our Series 79 Online Guide

Characteristics of Bonds

Nearly all bonds feature certain basic elements. That said, there are many variations on the “typical” bond, and some types of bonds do not have all the following characteristics.

The terms that apply to a specific bond are specified in a formal agreement between the bond issuer and the bondholder known the bond indenture, deed of trust, trust indenture, or just the indenture. The indenture specifies when and how the issuer will make payments of interest and principal. The terms may also be summarized in a bond prospectus.

The Trust Indenture Act of 1939 required the use of indentures, specified the information that must be disclosed, and mandated certain provisions intended to protect bondholders. Notably, the Act requires the issuer to appoint an independent trustee, who is empowered to liquidate assets of the bond issuer if the issuer becomes insolvent and defaults. The Trust Indenture Act also requires the issuer to periodically report its financial information to the trustee and the bondholders. Subsequent legislation modified and relaxed some of the specific requirements of the Trust Indenture Act, and the SEC has exempted bond issues with an aggregate value of less than $5 million from its provisions. Bond offerings that mature in 270 days or less are also exempt.

Bonds have a specific lifespan. A bond’s maturity is the date on which the bond becomes due. At maturity, the issuer redeems the bond by repaying the par value to the bondholder. A bond’s maturity is also called, redundantly, the maturity date. A bond’s term is the length of time, usually measured in years, until maturity.

The par value or face value of a bond is the amount of money for which the bond

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