Lehman Brothers: Introduction to Bond Math : Fenix Investors

A bond is a debt instrument that allows issuers to finance capital needs. It obligates the issuer to pay to the bondholder the principal plus interest.
- A buyer of the bond is the lender or investor
- A seller of the bond is the borrower or issuer.
When an investor purchases a bond, he is lending money to the government, municipality, corporation, federal agency or other entity.
In return for buying the bond, the issuer promises to pay the investor a specified rate of interest during the life of the bond and to repay the face value of the bond (the principal) when it “matures,” or comes due.
In addition to operating covenants, the loan documents require the issuer to spend the bond proceeds for the slated projects.
Among the types of bonds an investor can choose from are: U.S. government securities, municipal bonds, corporate bonds, mortgage and asset-backed securities, federal agency securities and foreign government bonds, among others.
A bond can also be thought of as a contract between the issuer and investor. This contract specifies, for example, the terms of the bonds, the funds from which debt service will be paid and any operating covenants.