This paper is all about bonds and their different types Essay

This paper is all about bonds and their different types - Essay Example Let's have a glance over the definition of Bonds and their importance and usage. A debt security in which the issuer is liable to pay interest at a later date to the security holder, which termed as maturity is called bonds. More precisely we can say that a bond is a type of a loan in which the person which issues the bonds is termed as borrower and by contrast a person which holds it, termed as lender. Interest or coupon rate is the thing which becomes a bridge between the borrower and lender which ultimately constrains the value of return, and it must be repaid at fixed interval over a specified period of time. A little bit contradiction found between the bonds and stocks. In general, both are securities but stock holders are the equity stake holder of the company and known as the real owner of the entity, while the bond holders are the lenders to the issuer, which usually have a specified term of maturity after which the bond security gets redeemed (Vernimmen, 2006). According to the statistics of the Federal Reserves (FED), there are more than $1.7 trillion municipal securities, $3.6 trillion of outstanding US Treasury securities, $2.7 trillion of corporate bonds and more than $470 billion of bonds issued by the foreign governments and corporations in the United States. There are several types of bonds a corporation issues. Usually treasury bonds are referred as the government bonds, whi... anding US Treasury securities, $2.7 trillion of corporate bonds and more than $470 billion of bonds issued by the foreign governments and corporations in the United States. There are several types of bonds a corporation issues. TREASURY BONDS: Usually treasury bonds are referred as the government bonds, which are issued by the US federal government. The bonds are free from default risk because the federal government will make payments on the promised time period. Now, we are well aware with the fact that the treasury bonds have no default risk but that's not mean that such bonds are totally free from risk because the price of the bonds may increase or declines with the fluctuations in the interest rates (Vernimmen, 2006). Treasury bonds are termed as the safest bonds, because the collateral of these bonds are in the hands of the government, which attracts the confidence of the investors and become a triumph for both the corporations and the bond holders. CORPORATE BONDS: We can get an idea in an instant from the name of the corporation bonds that the bonds which are issue by the corporations in order to raise the overall equity of the firm are called corporation bonds. As compared to the treasury bonds, corporation bonds have the default risk appetite in it. It means from any contingency, if the firm envisaged a bad time on the financial health then probably the firm is unable to facilitate its bond holders or we can say that unable to meet or fulfill their financial promises and legal obligations (Cinnamon, 2006). Level of default risk varies with the characteristics of the corporate bonds, which often refereed as "credit risk". MUNICIPAL BONDS: Municipal bonds are also issued by the local government. Its also have default risk like the corporation bonds.