Farm bond : One purpose of a sinking fund is to repurchase outstanding bonds. Sinking fund provision of the corporate bond indenture requires a certain portion of the issue to be retired periodically. The entire bond issue can be liquidated by the maturity date. Issuers may either pay to trustees, which in turn call randomly selected bonds in the issue, or, alternatively, purchase bonds in open market, then return them to trustees.
For the creditors, the fund reduces the risk the organization will default when the principal is due: it reduces credit risk.
However, if the bonds are callable, this comes at a cost to creditors, because the organization has an option on the bonds: The firm will choose to buy back discount bonds selling below par at their market price,while exercising its option to buy back premium bonds selling above par at par. Therefore, if interest rates fall and bond prices rise, a firm will benefit from the sinking fund provision that enables it to repurchase its bonds at below-market prices.
Some other important features of bonds are presented below, namely the yield, market price and putability of a bond. The yield is the rate of return received from investing in the bond. It usually refers either to the current yield, which is simply the annual interest payment divided by the current market price of the bond often the clean price , or to the yield to maturity or redemption yield. Yield to maturity is a more useful measure of the return of the bond, taking into account the current market price, the amount and timing of all remaining coupon payments, and of the repayment due on maturity.
Eurozone Government Bonds Yield : Development of yield to maturity of bonds of maturity of a number of Eurozone governments.
The market price of a tradeable bond will be influenced — amongst other things — by the amounts, currency and timing of the interest payments and capital repayment due; the quality of the bond; and the available redemption yield of other comparable bonds which can be traded in the markets. The price can be quoted as clean or dirty. The issue price at which investors buy the bonds when they are first issued will typically be approximately equal to the nominal amount.
The net proceeds that the issuer receives are thus the issue price, less issuance fees. The market price of the bond will vary over its life: it may trade at a premium above par, usually because market interest rates have fallen since issue , or at a discount below par, if market rates have risen or there is a high probability of default on the bond.
Some bonds give the holder the right to force the issuer to repay the bond before the maturity date on the put dates. These are referred to as retractable or putable bonds.
Put dates are the dates on which putable bonds can be redeemed early. This type of bond protects investors: if interest rates rise after bond purchase, the future value of coupon payments will become less valuable. Therefore, investors sell bonds back to the issuer and may lend proceeds elsewhere at a higher rate. Bondholders are ready to pay for such protection by accepting a lower yield relative to that of a straight bond.
Price of a puttable bond is always higher than the price of a straight bond because the put option adds value to an investor. Yield on a puttable bond is lower than the yield on a straight bond.
Privacy Policy. Skip to main content. Bond Valuation. Search for:. Key Characteristics of Bonds. Par Value Par value is the amount of money a holder will get back once a bond matures; a bond can be sold at par, at premium, or discount. Learning Objectives Assess when a bond should be sold at its par value. Key Takeaways Key Points When a bond trades at a price above the face value, it is said to be selling at a premium.
Coupon Interest Rate The coupon rate is the amount of interest that the bondholder will receive per payment, expressed as a percentage of the par value. Learning Objectives Classify bonds based on coupon rate. Key Takeaways Key Points Coupon interest rate is usually fixed throughout the life of the bond. It can also vary with a money market index. Based on different coupon rates, there are fixed rate bonds, floating rate bonds, and inflation linked bonds.
Key Terms time value of money : The value of money, figuring in a given amount of interest, earned over a given amount of time. Maturity Date Maturity date refers to the final payment date of a loan or other financial instrument. Learning Objectives Define a US security based on its maturity date.
Key Takeaways Key Points As long as all due payments have been made, the issuer has no further obligations to the bond holders after the maturity date. In the market for United States Treasury securities, there are three categories of bond maturities: short term, medium term, and long term.
The holder of the puttable bond has the right, but not the obligation, to demand early repayment of the principal. What was the interest rate for the Savings Notes? What is the meaning of the acronym -bund- listed among the european bonds? Term structure of interest rates.
What is renminbi-denominated bonds? What is meant by collective action clause? Would like address to redeem retirement bonds? Answers » Categories » Bonds. I have noticed the tenor of a loan could be 3 years, while the maturity date of the same loan is 15 years. What is the difference between the tenor and the maturity date? Spam Inappropriate Illegal? MORE: loans. Answer this question by Anonymous - Already have an account? Save my name, email, and website in this browser for the next time I comment.
Subscribe To Our Newsletter. Last Updated on July 23, by Ope Quadri Over time, you would hear banking institutions and money lenders mention terminologies like tenor and maturity. Join InfomediaNG on Telegram. Leave a Comment Cancel Reply Your email address will not be published. And get notified everytime we publish a new blog post.
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