3.3.1. General Features of Bonds
Corporations and other organizations borrow capital by issuing bonds. A bond is a promise-to-pay issued by the borrowing company for the amount of money lent by the bondholder. The company that issues the bond promises to return a specific amount of money to the lender by a certain date and to deliver a periodic interest payment on the borrowed funds. Bonds have a maturity date ranging from 1 to 20 years or more. This is the date the bond must be redeemed, that is, when the amount of money originally borrowed, the principal, must be repaid.
The interest rate, also called the coupon rate or the nominal yield, is the percentage of the principal written on the bond certificate that must be paid annually as payment for the loan. For example, a coupon rate of 5% on a $1,000 bond requires the issuing company to pay the bondholder $50 interest annually. Interest is usually paid in two semiannual installments, and it must be paid religiously as long as the borrowing company is solvent. The coupon rate is a function of many factors, including the company’s credit standing at time of issue, the term of the bond, prevailing interest rates, and any peculia