General Information

Bonds are essentially loans (fixed income from interests).

Figure 1: How the bonds are created (image taken from here).

  1. The bank gives the loan to the borrower.

  2. The bank sells each bond above its par value (e.g. $1,005 instead of $1,000) and that it's how it makes money (underwritings fee).

  3. The investor will get 5% per year (based on the par value, not what they paid, in this case $50) as well as the par value when the bonds matures -> Steady income (typically paid twice per year) and the par value back.

  4. The borrower will be paying $50 as installment per year and the bank is just the middleman; in reality the borrower pays "directly" the investors.

Risks

  • Company or Gov failure?

  • Interest rates changes

  • Inflation

If a company liquidate/backrupt the equity is distributed in the following order:

  1. Bond holders

  2. Preferred share holders

  3. Common share holders

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