January 29, 2022


Accounting + Finance Blog

Meaning of Bonds and Key Explanations

Meaning of Bond and Key Explanations

There are many ways to invest your hard earned money. These didn’t include Ponzi schemes nor pyramids. Bonds investment are a powerful way to invest your cash and earn a pretty return from it. In this article, let’s take a look at it.

Definition — What are Bonds?

A bond is a certificate given to a bondholder as a proof that he or she has lent money to a corporate body or the government. Bonds can also be defined as a type of fixed income investment that is similar to a loan issue by a company or government to a group of creditors or debtholders.

Key Explanations

A certificate. It is a certificate. When a person buys a bond, a certificate is issued by the issuer as a proof that he or she is a creditor of that company. The holder of such certificate can decide to sell the bond to a third party. This is true for bonds listed on a stock exchange.

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Read: What are shares? Key points and explanations

A holder. The holder of a bond is called a debtholder, bondholder or simply a creditor. In each case, it means that the entity issuing the bond has an obligation to pay back the money to the holders. The holders also receive interest.

Corporate or Government Bond. The investment can either be from a corporate entity or from the government. Debenture is the name used for the corporate type. However, in recent times, debenture is rarely used as an investment term or at stock markets. Government bonds are issued by either a state or federal government. The interest rate for corporate type is higher than that of the latter.

A type of fixed income investment. Another type of fixed income investment that is widely known is preference shares. By fixed income it means that the interest rate or the returns expected by the debt holder is fixed and the amount of such interest doesn’t change. If a holder is expected to receive a return of investment of 300,000 Naira per annum. That is what the creditor will earn every year throughout the lifetime of the bond.

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How Bonds are Listed is a Stock Exchange Market

Private companies can issue bonds to individuals in what are called private placements. Most of the time, it is public companies that list bonds in a stock exchange market. A bond may be listed as N100 or N1000 per single unit. This is the face or par value. If it is sold at a premium, then it means it is sold above the par value say N120 or M1,200 respectively. If sold at a discount, it means it is sold less than the face value. That is, N90 or N900 respectively.

Meaning of Cumulative Preference Shares with Key Explanations

It also attracts a fixed interest rate. And may be stated as 6% 200,000 Bond for N1250 each. That is, the interest rate for the bond is 6 percent. The total bond available for subscription (or for sale) is 200,000. And the price for it is N1,250. Which is sold at a premium by N250. If a bond holder bought 20,000 units of the bond, it means he or she paid 25 million Naira. And earn an interest of 1.5 million every year.

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To conclude, a bond is a certificate acknowledging a loan issued by a company or government. The holder of such investment is a creditor, bond holder or debtholder. Furthermore, it is classified as fixed income investment. Holders receive fixed interest based on the units of bonds bought.