Learn about Bonds

While stocks, both common and preferred, are equity securities and represent ownership in a corporation,

bonds are debt securities. A bondholder has, in effect, a debtor/creditor relationship with the corporation or governmental agency that issued the bond. Many stocks pay dividends; most bonds pay interest. Bonds are quite important in the financial scheme of things. Most of the money raised in the primary market (the new-issue market) is in the form of bonds rather than stocks. Bonds issued by a given company are safer than any equity security issued by that same company because their interest must be paid in full before any dividends may be paid on either preferred or common stock. Broadly speaking, bonds are higher on

the safety scale than stocks but generally not as rewarding an example of the risk-reward relationship.

Bonds issued by corporations (as opposed to bonds issued by municipalities and the federal government) trade in points and eighths as a percentage of par. One bond is considered to have a par value of  LKR100. or LKR1000. This means that if you own one bond, the company that issued the bond owes you LKR100 and will pay you that LKR100 when the bond matures. This LKR100 is the bond’s par value, also called its face value. Either term means the amount of the loan represented by the bond, that is, the amount the issuing company has borrowed and must repay when the due date (maturity date) arrives.

To be continued.....