INTELLIGENCE ROOM
The Intelligence Room is an educational resource for members. It does not constitute investment advice, a recommendation, or an offer to buy or sell any financial instrument.
The Bond Market
A bond is a loan divided into tradable securities.
For example, a company may issue a EUR 100 million bond with a five-year maturity and a 4% annual coupon. That means investors lend EUR 100 million to the company. The company pays 4% per year, or EUR 4 million annually, and at the end of the fifth year it repays the EUR 100 million principal.
Although it is called fixed income, the bond market is not simple and is not necessarily safe. It is probably the most important market in the global financial system because it determines the price of money, the cost of financing for governments and companies, and the reference point for mortgages, loans, company valuations, private equity, infrastructure and almost all financial assets.
| Asset | Core idea |
|---|---|
| Equities | Ownership: you buy part of a company. |
| Bonds | Debt: you lend money to a government, company or other entity. |
| Importance | The bond market determines the price of money, the cost of financing and the valuation reference point for many other assets. |
| Concept | Meaning |
|---|---|
| Issuer | The borrower: a government, company, bank or public entity. |
| Principal / face value | The amount that will be repaid at maturity. |
| Coupon | The interest paid by the bond. |
| Maturity | The date on which the principal is repaid. |
| Price | What it costs to buy the bond in the market. |
| Yield | The expected return if the bond is held to maturity. |
| Rating | An assessment of the issuer's credit risk. |
| Spread | The risk premium over a bond considered safe. |