Investing in Bonds (PART 1).
A bond represents a loan made by an investor to a borrower. The borrower is typically a corporate or government institution. Governments borrow from investors through treasury bonds while corporate institutions borrow from the investing public through corporate bonds. Proceeds from bonds are used by government and corporate institutions to finance operations and projects. Bond holders are considered creditors of the bond issuers. Raising capital through bond issuance is an alternative to bank loans for corporate and governments.
Details of bonds include start date that is the date the bond is issued and interest starts to accrue on the bond, maturity date which is the date the bond matures, coupon rate which is the interest payable on the bond, coupon payment date which is the date coupons will be paid. Other details include whether coupon rate shall be fixed throughout the life of the bond or coupons are pegged to a reference rate and may therefore change during the life of the bond.
Bonds are commonly referred as fixed income securities and they fall in the same asset class with fixed term deposit. Most corporate bonds are publicly traded. In Ghana the market for trading bonds is the Ghana Fixed Income Market (GFIM). A bond investor does not need to hold a bond all the way to maturity. Initial bondholders can sell to other investors on GFIM. Some corporate bonds that trade on GFIM include Bayport Financial bonds and Izwe Loans bonds.
The initial price of most bonds are usually set at par at GHS 100, GHS 1,000 or GHS 10,000 face value per bond. The face value of the bond is what will be paid back on maturity. The market price of the bond depends on a number of factors which includes the credit quality of the issuer, the coupon rate compared with the general interest rate in the market and the length of time to maturity.