Debt instruments represent contracts whereby one party lends money to another on pre-determined terms with regard to rate of interest to be paid by the borrower to the lender, the periodicity of such interest payment, and the repayment of the principal amount borrowed. In the Indian securities markets, we use the term ‘bond’ for debt instruments issued by the central and state governments and public sector organizations, and the term ‘debentures’ for instruments issued by private corporate sector.
The principal features of a bond are:
- Maturity: In the bond markets, the terms maturity and term-to-maturity, are used quite frequently. Maturity of a bond refers to the date of which the bond matures, or the date on which the borrower has agreed to repay (redeem) the principal amount to the lender. The borrowing is extinguished with redemption, and the bond ceases to exist after that date. Term to maturity, on the other hand, refers to the number of years remaining for the bond to mature. Term to maturity of a bond changes everyday, from the date of issue of the bond until its maturity.
- Coupon: Coupon refers to the periodic interest payments that are made by the borrower (who is also the issuer of the bond) to the lender (the subscriber of the bond). Coupon rate is the rate at which interest is paid, and is usually represented as a percentage of the par value of the bond.
- Principal: principal is the amount that has been borrowed, and is also called the par value of face value of the bond. The coupon is the product of the principal and the coupon rate.
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