Definition of 'Bond'

A debt investment in which an investor loans money to an entity

(corporate or governmental) that borrows the funds for a defined period
of time at a fixed interest rate. Bonds are used by companies,
municipalities, states and U.S. and foreign governments to finance a
variety of projects and activities.
Bonds are commonly referred to as fixed-income securities and are one of
the three main asset classes, along with stocks and cash equivalents.

Investopedia explains 'Bond'

The indebted entity (issuer) issues a bond that states the interest rate
(coupon) that will be paid and when the loaned funds (bond principal) are
to be returned (maturity date). Interest on bonds is usually paid every six
months (semi-annually). The main categories of bonds are corporate
bonds, municipal bonds, and U.S. Treasury bonds, notes and bills, which
are collectively referred to as simply "Treasuries."
Two features of a bond - credit quality and duration - are the principal
determinants of a bond's interest rate. Bond maturities range from a 90day Treasury bill to a 30-year government bond. Corporate and
municipals are typically in the three to 10-year range.

5 Basic Things To Know About Bonds

1. Basic Bond Characteristics
Maturity
The maturity date of a bond is the date when the principal, or par,
amount of the bond will be paid to investors, and the company's bond
obligation will end.
Secured/Unsecured
A bond can be secured or unsecured. Unsecured bonds are
calleddebentures; their interest payments and return of principal are
guaranteed only by the credit of the issuing company. If the company

fails, you may get little of your investment back. On the other hand, a
secured bond is a bond in which specific assets are pledged to
bondholders if the company cannot repay the obligation.
Liquidation Preference
When a firm goes bankrupt, it pays money back to investors in a
particular order as it liquidates. After a firm has sold off all of its assets, it
begins to pay out to investors. Senior debt is paid first, then junior
(subordinated) debt, and stockholders get whatever is left over. (To learn
more, read An Overview of Corporate Bankruptcy.)
Coupon
The coupon amount is the amount of interest paid to bondholders,
normally on an annual or semiannual basis.
Tax Status
While the majority of corporate bonds are taxable investments, there are
some government and municipal bonds that are tax exempt, meaning
that income and capital gains realized on the bonds are not subject to the
usual state and federal taxation. (To learn more, read The Basics of
Municipal Bonds.)
Because investors do not have to pay taxes on returns, tax-exempt bonds
will have lower interest than equivalent taxable bonds. An investor must
calculate the tax-equivalent yieldto compare the return with that of
taxable instruments.
Callability
Some bonds can be paid off by an issuer before maturity. If a bond has
a call provision, it may be paid off at earlier dates, at the option of the
company, usually at a slight premium to par. (To learn more,
read Callable Bonds: Leading A Double Life.)
2. Risks of Bonds
Credit/Default Risk
Credit or default risk is the risk that interest and principal payments due
on the obligation will not be made as required. (To learn more,
read Corporate Bonds: An Introduction To Credit Risk.)
Prepayment Risk
Prepayment risk is the risk that a given bond issue will be paid off earlier
than expected, normally through a call provision. This can be bad news
for investors, because the company only has an incentive to repay the
obligation early when interest rates have declined substantially. Instead of

continuing to hold a high interest investment, investors are left to

reinvest funds in a lower interest rate environment.
Interest Rate Risk
Interest rate risk is the risk that interest rates will change significantly
from what the investor expected. If interest rates significantly decline, the
investor faces the possibility of prepayment. If interest rates increase, the
investor will be stuck with an instrument yielding below market rates. The
greater the time to maturity, the greater the interest rate risk an investor
bears, because it is harder to predict market developments farther out
into the future. (To learn more, read Managing Interest Rate Risk.)
3. Bond Ratings
Agencies
The most commonly cited bond rating agencies are Standard &
Poor's, Moody's and Fitch. These agencies rate a company's ability to
repay its obligations. Ratings range from 'AAA' to 'Aaa' for "high grade"
issues very likely to be repaid to 'D' for issues that are in currently in
default. Bonds rated 'BBB' to 'Baa' or above are called "investment
grade"; this means that they are unlikely to default and tend to remain
stable investments. Bonds rated 'BB' to 'Ba' or below are called "junk
bonds", which means that default is more likely, and they are thus more
speculative and subject to price volatility.
Occasionally, firms will not have their bonds rated, in which case it is
solely up to the investor to judge a firm's repayment ability. Because the
ratings systems differ for each agency and change from time to time, it is
prudent to research the rating definition for the bond issue you are
considering. (To learn more, read The Debt Ratings Debate.)
4. Bond Yields
Bond yields are all measures of return. Yield to maturity is the
measurement most often used, but it is important to understand several
other yield measurements that are used in certain situations.
Yield to Maturity (YTM)
As said above, yield to maturity (YTM) is the most commonly cited yield
measurement. It measures what the return on a bond is if it is held to
maturity and all coupons are reinvested at the YTM rate. Because it is
unlikely that coupons will be reinvested at the same rate, an investor's
actual return will differ slightly. Calculating YTM by hand is a lengthy
procedure, so it is best to use Excel's RATE or YIELDMAT (Excel 2007
only) functions for this computation. A simple function is also available on
a financial calculator.(Keep reading on this subject in Microsoft Excel
Features For The Financially Literate.)

Current Yield
Current yield can be used to compare the interest income provided by a
bond to the dividend income provided by a stock. This is calculated by
dividing the bond's annual coupon amount by the bond's current price.
Keep in mind that this yield incorporates only the income portion of
return, ignoring possible capital gains or losses. As such, this yield is most
useful for investors concerned with current income only.
Nominal Yield
The nominal yield on a bond is simply the percentage of interest to be
paid on the bond periodically. It is calculated by dividing the annual
coupon payment by the par value of the bond. It is important to note that
the nominal yield does not estimate return accurately unless the current
bond price is the same as its par value. Therefore, nominal yield is used
only for calculating other measures of return.
Yield to Call (YTC)
A callable bond always bears some probability of being called before the
maturity date. Investors will realize a slightly higher yield if the called
bonds are paid off at a premium. An investor in such a bond may wish to
know what yield will be realized if the bond is called at a particular call
date, to determine whether the prepayment risk is worthwhile. It is
easiest to calculate this yield using Excel's YIELD or IRR functions, or with
a financial calculator. (For more insight, see Callable Bonds: Leading A
Double Life.)
Realized Yield
The realized yield of a bond should be calculated if an investor plans to
hold a bond only for a certain period of time, rather than to maturity. In
this case, the investor will sell the bond, and this projected future bond
price must be estimated for the calculation. Because future prices are
hard to predict, this yield measurement is only an estimation of return.
This yield calculation is best performed using Excel's YIELD or IRR
functions, or by using a financial calculator.

http://www.investopedia.com/university/bonds/
http://online.wsj.com/mdc/public/page/2_3020-treasury.html
Yield Curve: http://www.investopedia.com/terms/y/yieldcurve.asp
Note: the 30 yr rate is only 3.15% but a lot of money go to bond
market. People are conservative now. Economy uncertainty.
Duration: http://www.investopedia.com/video/play/basics-bondduration/
http://www.investopedia.com/university/advancedbond/advancedbond
5.asp

Definition of 'Duration'
A measure of the sensitivity of the price (the value of principal) of a fixedincome investment to a change in interest rates. Duration is expressed as
a number of years. Rising interest rates mean falling bond prices, while
declining interest rates mean rising bond prices.

Investopedia explains 'Duration'

The duration number is a complicated calculation involving present value,
yield, coupon, final maturity and call features. Fortunately for investors,
this indicator is a standard data point provided in the presentation of
comprehensive bond and bond mutual fund information. The bigger the
duration number, the greater the interest-rate risk or reward for bond
prices.
It is a common misconception among non-professional investors that
bonds and bond funds are risk free. They are not. Investors need to be
aware of two main risks that can affect a bond's investment value: credit
risk (default) and interest rate risk (rate fluctuations). The duration
indicator addresses the latter issue.