Lehman Brothers: Introduction to Bond Math
- 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.
Source: Lehman Brothers