A bond is simply a type of loan taken out by companies. Investors lend a company money when they buy its bonds, and in exchange, the company pays an interest “coupon” at predetermined intervals and returns the principal on the maturity date, ending the loan (coupon = The interest rate stated on a bond when it’s issued. The coupon is typically paid semiannually; For example, a $1,000 bond with a coupon of 7% will pay $70 a year.
Each bond is different and can vary significantly based on the terms of the bond`s indenture, which is a legal and binding contract between a bond issuer and the bondholders, and it specifies all the aspects of a bond, such as maturity date, timing of interest payments, method of interest calculation, etc.
The bond has a maturity date, which is the date when the principal (meaning the amount borrowed separate from the interest or the original amount invested, separate from earnings, or the face value of the bond ) will be paid to investors, and the company’s bond obligation will end.
A bond can be secured or unsecured. In the case of those unsecured, their interest payments and return of principal are guaranteed only by the credit of the issuing company, and if the company fails, you may get little of your investment back. In the case of the secured bond, specific assets are pledged to bondholders if the company cannot repay the obligation.
When a firm goes bankrupt, it pays money back to investors in a particular order as it liquidates. After a firm has sold off all of its assets, it begins to pay out to investors. This is called liquidation preference.
The “coupon” amount is the amount of interest paid to bondholders, normally on an annual or semiannual basis. Regarding the tax status, while the majority of corporate bonds are taxable investments, there are some governments that are tax exempt, meaning that income and capital gains realized on the bonds are not subject to the usual state and federal taxation . Because investors do not have to pay taxes on returns, tax-exempt bonds will have lower interest than equivalent taxable bonds.