What is a bond?

Tip: the difference between bonds and corporate bonds/debentures is that bonds are issued by government and corporate bonds/debentures are issued by public companies, government, organizations, statutory bodies and others in need of finance.

The first thing that comes to most people's minds when they think of investing is the stock market. After all, stocks are exciting. Stories of investors gaining great wealth in the stock market are common. Bonds, on the other hand, don't have the same appeal. Plus, bonds are much more boring - especially during raging bull markets (when share prices are generally rising), bonds seem to offer a low return compared to stocks.

The problem large organizations and Government run into is that they typically need far more money than the average bank can provide. The solution is to raise money by issuing bonds (or other debt instruments) to a public market. Thousands of investors then each lend a portion of the capital needed. Really, a bond is nothing more than a loan for which you are the lender. The organization that sells a bond is known as the issuer. You can think of a bond as an IOU given by a borrower (the issuer) to a lender (the investor).  The reason bonds do not appeal to investors is because they offer fixed Interest usually paid every six months (semi-annually). The interest rate is often referred to as the coupon. The date on which the issuer has to repay the amount borrowed (known as face value) is called the maturity date. Bonds are known as fixed-income securities because you know the exact amount of cash you'll get back if you hold the security until maturity

Tip: Bonds are less risky instruments that offer a fixed interest.

For example, say you buy a Swaziland Government bond SG 007 issued in year 2002 with a face value of E1, 000, a coupon of 14%, and a maturing on the 31st August 2010.

This means you'll receive a total of E 140 (E1, 000*14%) of interest per year for the next 10 years. Actually, because this bond pay interest semi-annually (interest 1, 28 February & interest 2, 31 August), you'll receive two payments of E70 a year for 10 years. When the bond matures in 2010, you'll get your E1, 000 back.

To sum up, there is generally less risk in owning bonds than in owning stocks, but this comes at the cost of a lower return.

Also read this by this author: Newera Partners Issues new bond

Or Swaziland's official Stock exchange website: http://www.ssx.org.sz/

About the author

Gordon Bennett is a Training Officer at the Swaziland Stock Exchange and also writes Swazi related articles for Infoshoswaziland.com

© 2007 all rights reserved. This article may be republished online as is. Get more interesting Swazi articles from infoshopswaziland.comFor print publication, please contact info@knotell.co.sz info@knotell.co.sz

Learning about bonds

By Gordon Bennett (Swaziland Stock Exchange)