What is a Bond?

A bond is a loan and you are the lender. The borrower is usually the government, a state, a local municipality or a big company like General Motors. All of these entities need money to operate — to fund the federal deficit, for instance, or to build roads and finance factories — so they borrow capital from the public by issuing bonds.

When a bond is issued, the price you pay is known as its “face value.” Once you buy it, the issuer promises to pay you back on a particular day — the “maturity date” — at a predetermined rate of interest — the “coupon.” Say, for instance, you buy a bond with a $1,000 face value, a 5% coupon and a 10-year maturity. You would collect interest payments totaling $50 in each of those 10 years. When the decade was up, you’d get back your $1,000 and walk away.

A key difference between stocks and bonds is that stocks make no promises about dividends or returns. General Electric’s dividend may be as regular as a heartbeat, but the company is under no obligation to pay it. And while GE stock spends most of its time moving upward, it has been known to spend months — even years — going the other way.

When GE issues a bond, however, the company guarantees to pay back your principal (the face value) plus interest. If you buy the bond and hold it to maturity, you know exactly how much you’re going to get back (in most cases, anyway). That’s why bonds are also known as “fixed-income” investments — they assure you a steady payout or yearly income. And although they can carry plenty of risk, this regular income is what makes them inherently less volatile than stocks.

Global Bond: They have a minimum value of $1 billion and are effected simultaneously in Europe, America and Asia. The salient features of these bonds are that they permit to raise very high amounts. They offer very high liquidity since they are quoted on several exchanges while secondary market functions round the clock, with uniform price all over the world. They are especially used by governments, public enterprises, international organisations and private financial institutions.

External Bond Market: The external bond market refers to bond trading activity wherein the bonds are underwritten by an international syndicate, are offered in several countries simultaneously, are issued outside any country’s jurisdiction, and are not registered. The Eurobond market is a major external bond market. The external bond market combined with the internal bond market comprises the global bond market. Examples of an external bond are the “global bond,” issued by the World Bank, and Eurodollar bonds.

Internal Bond Market: The internal bond market refers to all bond trading activity in a given country and is comprised of both a domestic bond market and a foreign bond market. Also referred to as the “national bond market.” The internal and external bond markets comprise the global bond market

Bulldog Bonds: A sterling denominated foreign bond, priced with reference to the UK gilts.