Bond Markets

Bond markets
Bonds are debt instruments similar to loans: the issuer is the debtor, the investor or the buyer of the bond is the lender. The issuer promises to pay the interest and the nominal or face value of the security in the future. However, there are at least two significant differences between loans and bonds. First, bonds are traded securities, which means that the ‘lender’ does not have to keep the asset until maturity, he can sell it on the secondary market. Second, the interest rate that the bond pays – also called coupon rate – is not necessarily equal to the return expected by the investors. Because of this, the loan amount that the issuer receives initially and that he pays back at maturity might be different.
The future cash flows of a bond can be determined according to the following five parameters: face value, coupon rate, interest payment period, principal payment schedule, time to maturity. The face value (or nominal value) is the amount the issuer has to pay back to the lender in the form of principal payments. The coupon rate of the bond is always expressed as an annual percentage of the outstanding face value. If the interest payment period is shorter than one year, we calculate the time-proportional interest linearly. The interests might be paid annually, semi-annually, quarterly, and so forth. In the case of government bonds, annual and semi-annual interest payments are the most frequent. The simplest and most usual principal payment schedule is when the entire face value is paid in one sum, at maturity. In this case, we call the instrument bullet bond, while in the case of more, partial principal payments, we call it amortising bond.