Bond / Note / Debt security
A bond is a written promise to repay borrowed money with interest, at some future date, usually several years after the date of issue. Bonds are also called notes, bills, or debt securities (any of these terms may represent bonds on the balance sheet, for instance). This entry explains bond characteristics and bond investing in context with bond related terms, such as par, yield, current yield, yield to maturity, coupon, zero coupon, convertible bond, and others.
Companies and governments sell bonds (create debt) in order to borrow funds for present use. Investors buy and sell debt (bonds) in order to earn interest and possibly benefit from changes in bond market prices.
The bond issuer typically promises to pay the bond holder interest during the life of the bond, at a specified rate (percentage of the bond's face value), and then repay the principal at the end of its life when the bond reaches maturity. For investors, knowing ahead of time the amounts and timing of forthcoming interest payments, gives bonds very different market price dynamics from other kinds of securities, such as shares of stock. Bond prices rise or fall primarily in response to changes in prevailing interest rates (see the section Bond Yield, below).
When a company issues bonds, the debt appears as a liability on its balance sheet, and when companies invest in bonds issued by other companies, the bonds appear on the (bond holding) company's balance sheet as assets (See Balance Sheet Example, below).
Note that there are various classes of bonds that differ with respect to the timing of interest payments as well as owner options and issuer options during the life of the bond. (See Basic Bond Concepts, below)
• Basic Bond Concepts
• Bond Yield
– Current Yield
– Yield to Maturity (YTM)
– Yield Mathematics
– YTM vs. Internal Rate of Return (IRR)
– YTM for Zero Coupon Bonds
– Finding Yields with Microsoft Excel
– Discount and Premium Pricing
– Yield Curves and Interest Rates
• Bond Issuers
• Bond Ratings
• Balance Sheet Example - Bond Debt and Bond Assets
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Basic Bond Concepts
A number of common terms have special meaning when they refer to bonds, including terms terms such as par, coupon, yield, and others. This section and the following section explain these terms and other basic bond concepts.
Par Value
The bond's par value, or face value, is the amount that the issuing company or government entity promises to repay the bond holder at a certain date (maturity date). A so-called "$100 Bond" has a par value of $100, meaning the bondholder will be repaid $100 at maturity in addition to any interest earned.
Source.
Bonds (like shares of stock) may be bought directly from issuing entity or they can be bought and sold in a secondary market.
Price
When the investor buys newly issued bonds directly from the issuing company or government entity, the selling price is usually close to the bond's par value (face value). During the life of the bond, however, the market price can and probably will fluctuate, depending on a number of factors, including
- Prevailing interest rates: Rates that may affect bond prices include especially current interbank lending rates, government lending rates, inflation rates, and interest rates paid by competing investments.
Bond prices fall when interest rates rise. Because most bonds pay interest as a percentage of their original (par) value, a lower price for the bond effectively gives the new purchaser a higher return rate (relative to the new purchase price), comparable to prevailing interest rates. On the other hand, when prevailing interest rates fall, bond prices typically rise for reasons based on the same dynamics. - The issuer's credit rating: if the market believes that repayment at maturity from this issuer (lender) is at risk, the issuer's bond rating suffers and market price declines. When investors see a higher risk of repayment from an issuer, the issuer must offer higher interest rates to attract bond buyers.
This dynamic is recognized by saying that risky companies have a higher cost of capital, or higher cost of borrowing. - Economic conditions: Bond prices may change when investors anticipate changes in interest rates, or in the health of the issuer's industry segment.
Interest payment
Most bonds pay interest periodically through the life of the bond. (As an exception to this, however, see the description of zero coupon bonds below). Periodic interest payments are almost always paid semiannually.
- Bearer bonds and coupons. Through most of the 20th century, bond certificates were printed with a number of coupons attached. When an interest payment was due, the bearer simply "clipped" a coupon and sent it to the issuer. Bonds of that type are known as bearer bonds, because payments are made to the person with physical possession of the certificate and coupons. Not surprisingly, many bond owners during this period kept their bond certificates in safe deposit boxes.
- Registered bonds. Starting in the early 1980's, bond issuers transitioned to registered bonds which print the owner's name on the certificate and send regular interest payments to the registered owner automatically. When a registered bond is traded, of course, the change in ownership must be registered with the issuer.
- Book entry system. More recently, bond issuers have further transitioned to the so-called Book Entry system, through which interest payments are sent directly to owner's account with a financial institution.
Even though paper coupons have all but disappeared from bond investing, the terms coupon-paying bond and coupon rate are still used (coupon rate is the interest rate described above, a percentage of par value paid periodically to bond holders).
Zero Coupon Bonds
So-called zero coupon bonds pay no interest during the life of the bond. Instead, the bondholder receive a single payment at maturity, which includes interest earned and repayment of the original face value price. For zero coupon bonds, the purchase price at the start of the bond's life is well below the total payment at maturity.
For instance, a 10-year zero coupon bond with face value of $10,000 should sell for about $4,564 at the start of its life. This assumes an 8% annual interest rate and payment of $10,000 to the bond holder 10 years later at maturity. Note that $4,564 is the present value for a future value of $10,000, with a discount rate of 8% compounded semiannually for 10 years. (For a complete explanation of these terms, see time value of money in this encyclopedia. For working spreadsheet examples of the calculations, see Financial Metrics Pro.)
Interest rate
Fixed rate bonds pay interest (usually semiannually), as a fixed percentage of the bond's face value. A $10,000 bond paying 8%, pays $400 interest to the bond holder every 6 six months (for a total annual interest payment of $800, or 8% of face value).
This percentage, however, describes the bond holder's return rate only if the holder bought the bond at par value. The term yield refers to the bondholder's actual return rate, based on the actual purchase price, and other factors. This concept is explained in the following section, Bond Yield.
Most bonds currently traded are either (a) fixed rate coupon paying bonds or (b) zero coupon bonds, as described above. Note, however, that floating rate bonds are also available to investors, for which the interest rate is adjusted periodically to align with a standard interest rate index such as interest rates on US Treasury bills.
Special Provisions: Call, Put, and Conversion
Bonds may be issued with special provisions that give either the issuer or the investor options for ending the life of the bond.
- Bonds may be issued with a call provision, which allows the issuer to redeem the debt at a specified date and price before maturity. The bond issuer may want to take advantage of the call provision if interest rates decrease substantially and borrowing at a much lower rate becomes possible.
Bonds with a call provision provide protection for the issuer and increased risk for the investor. These bonds, therefore, usually compensate the investor by paying interest at higher rates than comparable bonds without the provision. - Bonds may also be issued with a put provision, which allows the bond holder to sell the bond back to the issuer at a given price and date. The bond holder may want to exercise the put option to bring in cash or, after interest rates have risen, reinvest the funds at a higher rate.
Bonds with a put providsion provide protection to the investor and increased risk to the issuer. These bonds therefore compensate the issuer by paying interest at lower rates than comparable bonds without the provision. - Some corporate bonds give the issuer the option to convert them into common stock shares instead of paying interest to the bondholder. This provision is known as a conversion option and the bonds are called convertible bonds.
Convertible bonds generally pay interest at lower rates than comparable non-convertible bonds, because they offer the investor the possible advantages of stock ownership.
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Bond Yield
The yield concept provides a common bond investing metric that let investors compare bonds of different kinds and maturities, in terms of the returns they offer. The bond's coupon rate (explained in the previous section, above) describes interest payments based on the bond's face value. Yield figures, however, describe the bond's effective return rate to the investor, taking into account the price actually paid for the bond, future interest earnings, and (in the case of yield to maturity) the issuer's repayment of bond face value.
The reason that investors turn to yield metrics, in addition to the simple coupon interest rate, should become clearer if you consider an investor who buys a bond with an 8% coupon rate and face value of $10,000. Suppose also this bond was bought in the secondary market for $8,500. Even though the investor paid $8,500 for the bond, it still returns $800 in interest each year (8% of the par value, $10,000, paid as $400 twice yearly). This suggests that the investor's $8,500 purchase is gaining effective returns somewhat above 8% of the purchase price. But what is the real, effective return rate? That is, what is the yield?
Two primary approaches to yield calculations attempt to answer these questions: Current yield and Yield to Maturity (YTM). Note in the examples below, by the way, that bond yield figures are percentages, but yields are also quoted in terms of basis points. A basis point is 1 /100 of 1%. Thus, a yield of 8% is also a yield of 800 basis points.
Current Yield
Current yield for a bond is simply the annual interest paid expressed as a percentage of the bond's purchase price. Current yield does not consider any gains or losses for the investor when the purchase price and face value payout at maturity are different.
Consider, for example, a bond purchase with these characteristics:
• Bond face value (par): $10,000
• Maturity: 10 years after issue
• Interest rate (coupon rate) paid: 8%
• Interest payment: semiannual ( 2 times per year)
- Current yield when priced at par. For the investor who buys the bond at face value (par), the current yield and coupon rate are the same. A $10,000 bond (face value), with a coupon rate of 8%, and bought for $10,000, pays $800 annually. The investor's annual return as a percentage of the investment (current yield) is 8%.
- Current yield when priced below par. If the $10,000, 8% bond in the example above were actually purchased at a market price of $8,500, it would still pay $800 per year interest, making a current yield of $800 / $8,500, or 9.4% (940 basis points).
A drop in the bond price below par would likely occur if interest rates in the economy in general had risen. Now, only at the lower price does the bond offer investors return rates comparable to new, higher rates available with other potential investments. - Current yield when priced above par. If the $10,000, 8% bond were purchased at a market price of $11,000, current yield would be $800 / $11,000, or 7.3% (730 basis points).
An increase in the bond price above par would likely occur if interest rates in the economy had fallen. Now, at the higher price, the bond offers investors return rates comparable to new, lower rates available on other potential investments.
Yield to Maturity
The Yield to Maturity (YTM) metric considers a bond's actual purchase price, its par value paid at maturity, and all interest actually earned during the bondholder's period of ownership. The YTIM calculation is a little more complicated than the current yield calclation above, because it involves time value of money concepts YTM is in fact equivalent to the financial metric internal rate of return, as shown below, and fully understanding the concept requires a basic understanding of present value and other time value of money concepts.
In a nutshell, yield to maturity is the discount rate (interest rate) that equates
- The purchase price of the bond with
- The present value of all future cash inflows (interest payments and face value repayment).
For the example bond ($10,000 par, 8% coupon rate, semiannual interest payment), purchased for $8,500 with six years remaining to maturity, the rate that equates (1) and (2) above is this bond's Yield to Maturity, 11.5%.
The next two sections show the mathematical basis for this result, and the section further below Discount and Premium Pricing, shows how the relationships between yields and coupon rates change when interest rates change. To skip the next maths sections and go directly to the following section, YTM for Zero Coupon Bonds, click here.
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Yield Mathematics
For the following example, yield to maturity is an interest rate that equates the purchase price with the present value of all future inflows from fhe investment. YTM is based on the same bond and transaction characteristics used above to calculate current yield, except that YTM also factors in the time remaining until maturity.
• Bond face value (par): $10,000
• Maturity: 10 years after issue
• Time remaining until maturity at purchase: 6 years
• Interest rate (coupon rate) paid: 8%
• Interest payment: semiannual ( 2 times per year)
Graphically, the cash flow stream for this investment looks like this:
Yield to maturity, then, is the interest rate that creates a net present value of all the cash inflows (to the right of the one cash outflow) equal to $8,500 (see the encyclopedia entry for time value of money for a complete coverage of these concepts). Note that there are 12 interest paying periods involved between the bond purchase and maturity (twice yearly payments for six years), and the interest rate for each is the annual rate (i) divided by 2. YTM for the bond is then the value of i that solves this equation:
8,500 = 400 / (1+ i / 2 )1 + 400 / (1+ i / 2 )2 + ... +400 / (1 + i / 2 )11 + 10,400 / (1 + i / 2 )12Looking ahead, we will find that an annual interest rate ( i ) of 11.5% solves this equation. 11.5% is the yield to maturity for this bond, for this investor. (1150 basis points).
In fact there is no known analytic solution for the above equation, so that spreadsheets and other software find the interest rate by "trial and error" (more accurately, they use "successive approximations"). The program calculates NPV with different discount rates, compares the result with the price to be matched, adjusts the discount rate for the next calculation, and so on, until it finds a value that satisfies the equation. You can get a sense of how this works from the following graph, which shows the NPV (sum of present values) of the cash inflows in the graph above, at different discount rates (different values of i).
The NPV curve is produced with the standard NPV formula:
For the example above, set
NPV = 8,500, and set FV0 equal to 0 (in other words, there is no immediate interest payment). Let all the other FVs from FV1 through FV11 equal 400 (semiannual interest payments are future values in the discounting calculation). Let FV12 equal 10,400 (the final interest payment plus par value repayment), and let q = 2 (the number of interest periods per year). The value of i that satisfies the equation in this case is 11.5%.
YTM vs. Internal Rate of Return (IRR)
If the exercise above looks familiar to you—solving an NPV equation for an interest rate—it is likely that you are already acquainted with another investment metric, the internal rate of return (IRR). IRR and YTM are mathematically the same concept, with only a slight difference in definition.
Once more, remember that YTM is the interest rate, i, that satisfies this version of the NPV equation:
Purchase Price = FV1 / (1+ i / 2 )1 + FV2 / (1+ i / 2 )2 + ... + FVn / (1 + i /2 )n
The definition formula for IRR simply moves "Purchase Price" to the other side of the equal sign, thereby creating an immediate cash outflow (and calling the immediate outflow FV0), and then asks for the same i that solves the equation:
0 = FV0 + FV1 / (1+ i / 2 )1 + FV2 / (1+ i / 2 )2 + ... + FVn / (1 + i /2 )n
Given the same cash inflows and outflows, the same value of i solves both equations. This is one reason that people trained in finance often turn to the IRR as a metric for evaluating and comparing potential business investments, even when the investments are quite different in nature. The projected IRR for, say, an investment in a marketing program can be compared directly with the YTM of a potential bond investment.
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YTM for Zero Coupon Bonds
For zero coupon bonds (bonds that pay interest and principal in a single payment at maturity), the yield to maturity concept is the same as shown in the example above, but simpler to apply. Here, there is only one present value cash flow to equate with the purchase price, namely, the face value payout at maturity.
- Zero Coupon bond when first issued. Consider first YTM for the 10-year zero coupon bond from an example in the previous section. The bond has a face value of $10,000 but sells at the start of its life for $4,564. The YTM for this bond is 8%, (800 basis points) which is simply the discount rate that equates the present value of the future payment ($10,000) with the non discounted value of the initial purchase price ($4,564).
- Zero coupon bond price after interest rate decrease. Consider the same zero coupon bond, now four years into its life with six years remaining until maturity. Suppose its market price at this time is $8,500. What is it's yield to maturity? YTM is the annual interest rate that brings the present value of a $10,000 payment down to $8,500, after 12 semiannual compounding periods (6 years). The semiannual interest rate that does this is 1.35% which, when annualized is a 2.7% YTM (280 basis points). The decrease in YTM (compared to the initial YTM) would likely result if interest rates in the economy in general had fallen.
- Zero coupon bond price after interest rate increase. Consider the same zero coupon bond four years into its life, with six years remaining until maturity, but now selling at a market price of $5,500. This is slightly above the initial par value purchase price ($4,564), but the bond is now only six years from maturity and, as maturity nears, a bond that maintains a constant yield will see its price move closer to par value. Now what is its yield to maturity? An interest rate (discount rate, or yield to maturity) of 10.3% creates a present value of $5,500 for a $10,000 payment five years away. The rise in YTM over it's initial value would occur if interest rates in the general economy had similarly risen. When interest rates rise, the bond will sell at a lower price.
Finding Yields With Microsoft Excel
Current yield is calculated simply as a ratio of two numbers, the periodic interest payment amount divided by the bond purchase price. However, Yield to maturity is found rather than calculated, by trying different interest rates until a rate is found that equates purchase price with the present value of all future payments to the investor.
Finding YTM values could be a cumbersome, calculation intensive exercise, except that we now have available an abundance of yield calculators on the internet, Most pre-programmed financial calculators also find YTM from a simple entry of bond data.
Alternatively, Microsoft Excel's YIELD functions provide a fast and easy way to find YTM. A single Excel function, YIELD, can be set up to deliver yield to maturity for both coupon paying bonds and zero coupon bonds.
Example: Finding YTM for a Coupon PAYING Bond With Excel's YIELD Function
The first example below re-uses data from above to show how Excel's YIELD function finds yield to maturity for a bond transaction with the characteristics shown here. Bold terms are Excel's names for YIELD function input parameters.
• Purchase transaction settlement: 1 October 2010 ( 6 years remaining until maturity)
• Maturity: 1 October 2016
• Interest rate (coupon rate) paid: 8%
• Pr: (Purchase Price): $8,500
• Bond face value (par), or redemption value: $10,000
• Interest payment frequency: 2 times per year
Excel produces Yield to Maturity with the function
YIELD(settlement,maturity,rate,pr,redemption,frequency,basis)
Using the example data, the cell that is to show YTM will look like this:
=YIELD(DATE(2010,10,1),DATE(2016,10,1),0.08,85,100,2)
The spreadsheet user should see the resulting YTM of 11.5% in the cell. Notice the following about the input parameters,
- Dates. Date entries here use Excel's DATE function. For settlement date, 1 October 2010, the user could have entered the sequential number Excel uses to store and manipulate dates (the default for that date on a Windows PC is 40452). However, it is clearer and easier for all involved to let Excel find the number through the DATE function, that is, by entering DATE(2010,10,1).
- The coupon rate can be entered either as a decimal fraction (0.08) or as a percentage (8%). Percentage entries should include the % sign. For the YIELD function, enter the annual coupon rate.
- Purchase Price (Pr) and redemption value (face value) are entered as units per 100. A price of $8,500 is entered as Pr of 85, and a redemption value of $10,000 is entered as 100.
- For most purposes, the basis parameter input can be omitted (thereby choosing the default setting). For those who wish to use it, basis allows for slightly different ways of calculating interest, e.g., 30 day months and 365 day year, vs a 360 day year and so. Excel's Help System explains more on this.
Example: Finding YTM for a Zero Coupon Bond With Excel's YIELD Function
The only difference between the above example, for a coupon paying bond, and the next example for a zero coupon bond, is the use of the rate parameter. Zero coupon bonds pay no periodic interest during the life of the bond, and so a "0" is entered for the YIELD function's rate parameter. Here again are similar bond data, but this time for zero coupon bond:
• Purchase transaction settlement: 1 October 2010 ( 6 years remaining until maturity)
• Maturity: 1 October 2016
• Interest rate (coupon rate) paid: 0%
• Pr: (Purchase Price): $8,500
• Bond face value (par), or redemption value: $10,000
• Interest payment frequency: 2 times per year
The spreadsheet cell that displays the YTM for this zerio coupon bond has this formula:
=YIELD(settlement,maturity,rate,pr,redemption,frequency,basis)
=YIELD(DATE(2010,10,1),DATE(2016,10,1),0.00,85,100,2)
The spreadsheet user should see the YTM value of 2.7% displayed. (Notice that the YIELD function requires a non-zero coupon frequency, the final paramater entered here, even when the coupon rate is 0. Entering a frequency of 0 produces an error message).
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Discount and Premium Pricing
Examples above showed that a single bond may have 3 different interest rates associated with it at any time:
1. The coupon rate
2. The current yield
3. The yield to maturity
All three rates will be equal only when the bond is selling at par value. When bond price is above or below par, these three rates will differ among themselves, and the relationships among them give rise to the bond market terms discount and premium. Consider again the example bond selling with these characteristics:
Face value (par): $10,000
Purchase price: $8,500
Coupon rate paid: 8%
Time to maturity: 6 years
Interest payment: semiannual ( 2 times per year)
Examples above showed how this bond has:
Interest (Coupon) rate: 8% < Current yield: 9.4 % < Yield to Maturity: 11.5%
A bond is said to be selling at a discount when the coupon rate is less than the current yield, and the current yield is less than the yield to maturity. Bonds sell at discount when interest rates in the economy in general are higher than they were at bond issue,
By the same reasoning, a bond is said to be selling at a premium when the coupon rate is greater than the current yield, and the current yield is greater than the yield to maturity. Consider once more the same bond, but selling now at a market price of $11,000:
Face value (par): $10,000
Purchase price: $11,000
Coupon rate paid: 8%
Time to maturity: 6 years
Interest payment: semiannual ( 2 times per year)
Now, using the calculations shown above, the three interest rates of concern have become:
Interest (Coupon) rate: 8% > Current yield: 7.3 % > Yield to Maturity: 6.2%
This bond is now selling at a premium, probably a result of interest rates having fallen since it was first issued.
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Yield Curves and Interest Rates
The examples above show that as interest rates in the economy rise and fall, bond prices also fall and rise in response. As a result, bond investors have a keen interest in forecasting future interest rates and in predicting interest rate changes. And, like all investors, they have a strong interest in understanding the risks in their investments. For bond investors, the yield curve is a central tool for interest rate analysis and risk management.
Some bond investors view the yield curve very much in the way that so-called "technical analysts" view stock price charts, believing that the charts (curves) contain information that helps predict price and interest changes. Others view the curves simply as a description of what the market expects interest rates and prices to do in the near and long term, and a tool for balancing risks against rewards.
In any case, a typical yield curve for bonds of a given class might have this form:
Bonds of approximately equal credit quality but differing maturities are plotted between axes that represent yield and time to maturity, as shown in the example.
To investors and analysts, the chart's message is conveyed in its shape. in this example, for instance, longer maturity bonds have a higher yield compared to shorter. Ordinarily this would be expected, because it is reasonable to view longer maturity bonds as riskier, and therefore having to pay higher yields. In any case, three main classes of yield curve shapes are called:
- Normal yield curve (illustrated above): shorter term bonds have lower yields, longer term bonds have higher yields.
- Inverted yield curve: Longer term bonds have shorter yields, shorter term bonds have higher yields. This would be taken as a sign that a recession is forthcoming (or at least, the market expects a recesssion).
- Flat curve, or humped curve: Relatively longer and shorter term bonds have similar yields. Medium term bonds may or may not have different yields. In either case, this would indicate that the market expects some kind of economic transition.
Yield curve slope also carries a message: A steep slope indicates a rapid change in interest rates, but a shallow slop indicates the opposite.
All three basic shape yield curves can be present in the same economy, at the same time, depending on the credit quality, issuing source, and nature of the bond's payment schedule. Yield curves, moreover, can change on a daily basis for some securities. The US Treasury, for instance, publishes yield curves for its Treasyr notes on a daily basis. Here is the yield curve for treasury notes published on 20 April 2010:
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Bond Issuers
Bonds are issued by corporations, governments and government agencies, and municipalities. There is also available a class of "asset backed" bonds, described below. Major bond categories, by issuer, include:
- Corporate Bonds
E.g., issued by Ericsson, in Sweden, or General Motors in the United States. The credit quality of corporate bonds depends on the financial ability and financial prospects of the issuing company. - Supranational Agency Bonds
E.g, issued by the World Bank. Bonds from supranational agencies generally have excellent credit ratings because they are backed with the "full faith and credit" of the governments that support sponser these agencies. - Government, Government Agency, and Government Sponsored Enterprise Bonds
E.g., issued by the United States Government, the Canadian Province or Ontario, or (in the United States) the Federal National Mortgage Association (Fannie Mae). Government bonds generally have excellent credit quality ratings, because they are backed by the "full faith and credit" of the issuing government. Note, however, that bonds issued by the US State of California might be seen as an exception to this rule. During two years of financial uncertainty for the state, 2009-2010, the states bond credit rating has varied between A- and BBB. - Municipal Bonds
E.g, issued by the city of Newark, new Jersey, or the city of Toronto, Ontario. To help municpalities lower the cost of borrowing, government sometimes allow municpalities to sell "Tax free" bonds, from which investors are not required to pay taxes on interest earnings. Tax free municpal bonds thus pay lower interest than comparable bonds without the tax exemption, but for investors, the tax savings compensate for the lower interest payments. - Mortgage backed / Asset backed / Collateralized debt obligations
These bonds originate through a process known as securitization, when a financial institution such as an auto finance company or credit card provider, turns its loans into marketable securities. These bonds are backed by assets, such as auto loan receivables or credit card receivables. Bonds in this class generally have excellent credit quality ratings (usually AAA), because they are backed by sources other than the loan originator.
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Bond Ratings
Bond investors and market analysits consider carefully the credit worhiness of bond issuers. A bond is a debt to be repaid, after all, and if there are uncertainties about the issuer's ability to repay at maturity, or even pay interest before then, the issuer must pay higher interest rates in order to sell bonds. So-called junk bonds are an extreme illustration of this principle: junk bonds pay extremely high interest rates but at the same time carry a significant risk of non payment.
Bonds are given grades, or credit worthiness ratings by independent rating services such as Standard & Poor's, Fitch, or Moody's. The table below shows Standard & Poor's rating system for long term Bonds, from highest credit worthiness (top) to lowest (bottom). A similar but slightly different set of ratings is used for short term bonds.
| The table shows Standard & Poor's rating system, Corporate-issued bonds (see previous section, Among corporate bonds, for instance, Microsoft |
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Balance Sheet Example - Bond Debt and Bond Assets
A company's bond debt appears on the balance sheet under Liabilities. In the balance sheet example below, note the entry for "Notes payable, short term" under Current liabilities, and "Bonds payable" under Long term liabilities.
When a company owns bonds (or notes) issued by another company, however, these appear on the balance sheet under Assets. Note below the entries for "Notes receivable" under Current Assets, and "Bonds held" under Long Term Investments & Funds.".
Grande Corporation Assets Liabilities Owners Equity |
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