What is a Bond?

Bonds or "Debt," means investing as the lender of debt investments. By purchasing debt, you effectively become a lender, where the borrower agrees to pay you back the money lent at a certain date with interest payments.

Interest payments are paid in either "coupons," or capital appreciation (paying you back more than you lent), or both.

Bonds are usually seen as safer more consistent investments than their Equity counterparts. Eg. Purchasing a Microsoft bond is usually a safer investment than purchasing its Stock.

Corporate vs Government Bonds

Common debt investments are lending to major organizations like Facebook (corporate bonds), or Countries like the United States Treasury (government bonds).

Corporate Bonds

Corporate bonds are debt issued by companies. When an investor buys a corporate bond, they are lending money to a company for a defined period of time in exchange for fixed or variable interest payments.

Government Bonds

Government bonds are debt issued by governments. When an investor buys a government bond, they are lending money to a country’s government for a defined period of time in exchange for interest payments.

How to Find Bonds on EquitySim

Use the bonds screener to search for bonds. The most basic ways to search for bonds are by Issuer, Maturity Date, and Coupon rate.

Issuer

A bond’s issuer is the entity that the investor loans money to when buying a bond. It could be a company, a government, or a government agency.

Maturity Date

The maturity date is the date at which the investor’s loan is paid back in full and interest payments stop.

Coupon Rate

A bond’s coupon is the annual interest rate paid. The coupon is quoted as a percentage of par value and is usually paid out semi-annually.

How to read bond data

More Bond Definitions

Coupon Type

There are many types of coupons, including fixed coupons, variable coupons, and zero coupons, among others.

Fixed coupon bonds pay a fixed payment throughout the life of the bond as well as full principal at maturity.

Variable coupons change throughout the life of the bond and are usually tied to a floating rate, such as LIBOR.

Zero-coupon bonds don’t have a payment like other bonds do. Yield from these bonds comes from the fact that they are issued at a discount ($950) and pay full principal at maturity ($1,000).

What kind of coupon is best for you depends on your view of where interest rates will go as well as your cash flow needs. For instance, if you think interest rates will rise, it may be wise to invest in a floating rate coupon. If you think interest rates will fall, a fixed coupon could be a good investment. A holder of a zero-coupon bond won’t receive income until maturity while a holder of a fixed or variable coupon bond will receive payments along the way.

Coupon Rate

A bond’s coupon is the annual interest rate paid. The coupon is quoted as a percentage of par value and is usually paid out semi-annually.

What is your acceptable range of yearly cash payout you expect to receive? If you invest $10,000 in a 6-year bond with a 5% coupon, then you will receive 12 payments of $250, or $3,000. The 5% coupon is a payment of $50 a year per bond.

Current Yield

Current yield is the bond’s coupon divided by the current market price.

For example, to calculate the current yield of a bond with a 5% coupon trading at 105 ($1,050), divide 5 by 105 and multiply the result by 100. You get a current yield of 4.76%. Notice that a higher price means a lower yield.

Current Price

Bond prices are quoted as a percentage of the bond’s par value, which is the amount the issuer will pay at maturity. The par value is often $1,000.

For example, a bond quoted at 99.25, or 99 8/32, means that the bond is trading at 99.25% of $1,000 par, or $992.50. To calculate the current price per bond, convert the quoted number to the numerical value, and multiply it by 10.

Industry

Industry performance is related to the price performance of corporate bonds.

For example, corporate bonds of energy companies will suffer if commodities aren’t doing well. Corporate bonds of defensive industries, like utilities, can be safer investments at the expense of higher yields compared to corporate bonds from other industries. Like with stocks, it is important to diversify across multiple industries to minimize risk.

Issue Size

Issue size is the quantity of a certain bond offering issued by a given issuer. It is calculated by multiplying the number of bonds issued by the bond’s face value.

Issue size is an indication of the issuer’s borrowing needs as well as the demand for the bond’s terms in the market at the time of issuance.

Yield to Maturity

Yield to Maturity or YTM is the annualized rate of return you receive if you hold a bond to maturity and reinvest all the coupon payments at the current yield. It is similar to current yield in that it is a measure of return, but it is different in that it takes the time value of money into account, meaning that it considers the present value of a bond’s future payments.

YTM is one of the most useful measures in determining whether a bond is a worthwhile investment for you. You’d ideally want to maximize YTM within your other constraints during bond selection (constraints like acceptable credit ratings, maturity, industry, etc). Given that YTM is an annualized rate, it is also a useful measure in the comparison of bonds with different maturities.

Credit Rating*

Credit ratings show the risk associated with a bond, looking at the financial health of the issuer and its ability to meet its debt obligations.

A bond with a rating of AAA or AA is low risk, A or BBB are medium risk. Anything below BBB is considered “junk”, meaning that it is low credit quality.

* not currently available at EquitySim.