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Tuesday, March 31, 2009

Bond Glossary



The Bond market is currently abuzz and is attracting heavy investments from investors because of the safety and capital preservation they offer. Bonds are similar to bank deposits with a few minor differences.

Let us have a look at some of the common terms used in the Bond Markets

Convertible Bonds:
These can be converted into the shares of the issuing company at a particular time.

Coupon Rate:
This is the interest received on the principal amount invested by us. It is generally paid half yearly or annually.

Current Yield:
It is the annual rate of return on the bond’s price

Face Value:
This is also called the Par value. This is the maturity amount that the bond issuer agrees to pay the investor

Default Rate:
It is the percentage of companies under a particular rating that have defaulted in making payments to its investors.

Interest Rate Risk:
This is the risk of change in price of the bond due to interest rate fluctuations in the market. Interest rates and bond prices are inversely related.

Yield to Maturity:
This is the rate of return that you get if you hold the bond till maturity. The return includes coupon payments as well as the maturity value. Change in yield reflects change in price of the bond and they are inversely related.

Yield Spread:
This is the difference between the yields of two bonds. Generally a bond’s yield spread is determined by calculating the difference between the bond’s yield and the yield on government securities.

Zero Coupon Bonds:
These are bonds that do not pay any interest. Instead, these bonds are issued at a discount and the difference between the face value and the issue price is the investors gain.


The next article would be on the aspects to be checked before investing in Corporate Bonds.

Happy Investing!!!!!

2 comments:

  1. Hi Anand,

    It would also be useful to elaborate on 'Duration' and 'Convexity'.

    Looking forward to reading more of your blogs.

    Cheers,
    Dev

    ReplyDelete
  2. Dear Anand Ji,

    Hello....

    Wonderful Blogs, u always post.Plz focus on some more topics of Share market...i.e. how to choose best broker,which shares are reliable to buy etc.& how portfolio can be made....
    Really appreciate urs knowledge...

    Regards

    Sanjiv chopra, New Delhi

    ReplyDelete

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