Answer: A bond is a debt instrument by which a company or government borrows money for a fixed period at a fixed rate of interest. Its features are:
- Debt instrument: a bond is an acknowledgement of debt; the bond holder is a creditor of the issuer, not an owner.
- Fixed maturity: it is issued for a fixed period and repaid (redeemed) on maturity.
- Fixed return: bond holders get interest (coupon) at a fixed rate at fixed intervals, whether or not the issuer earns profit. Zero-coupon (deep discount) bonds are issued at a discount and repaid at face value.
- No voting rights: bond holders do not take part in management and have no voting rights.
- Security: bonds may be secured by a charge on assets or unsecured.
- Priority in repayment: on winding up, bond holders are repaid before shareholders.
- Transferability and listing: bonds are freely transferable and may be listed and traded on stock exchanges.
- Credit rating: bonds offered to the public are rated by credit rating agencies, which helps investors judge the risk.
