Bonds are a form of debt security in which the issuer owes a debt to the bondholders. The issuing institution will repay the principal at a fixed date, named maturity date. Depending on the term of the bond, we can differentiate between three categories of bond maturities - Bills will have maturities up to one calendar year; Notes will have maturities in the range of one to 10 years; Bonds will tend to exceed 10 years.
The issuing body can be a company, credit institution or government authority. The issuer is bound to pay interest to the holders of bonds, effectively turning them into creditors while the issuer becomes the debtor. Bonds tend to be used for external financing. There are a number of categories of bonds, depending on their level of risk, which is determined by how far down the ‘pecking order’ they rank when it comes to repayment of those debts.
Bonds can be fixed rate, where the coupon or interest rate remains unchanged during the life of the bond; they can be floating rate - where the interest is recalculated according to determined interest rate index; inflation linked bonds tie the principal and the interest payments to inflation and perpetual bonds have no maturity date.
