Vocabulary about a topic
Essential finance vocabulary 1: Bonds
- Published: 15/10/2010 at 07:18 PM
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A bond is a formal contract to repay borrowed money (principal) together with interest charged for the use of this money.
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Stocks, bonds and bank loans are three major sources of funding for large companies.
In the balance sheet of a company: Assets = Liabilities + Owner's Equity. Bonds and bank loans are liabilities and stock is part of the owner's equity of a company.
Bonds lend companies and governments money for different lengths of time. This length of time is known as the maturity of the bond.
The maturity date of a bond is the date when the bond contract ends and the amount borrowed must be paid back to bondholders.
The coupon of a bond is the fixed interest rate paid to bondholders throughout the life of a bond.
Market interest rates and the current price of a bond are inversely related. When market interest rates rise, bond prices fall. When interest rates fall, bond prices rise. It is easy to see why this is the case since the bond pays a fixed interest rate (coupon) and when market interest rates rise the fixed interest paid by the bond becomes less attractive (In macroeconomics, this is usually demonstrated with a bond without maturity or "consol" bond)
The yield of a bond is the annual income an investor gets from a bond as a percentage of the current market price of the bond.
The yield curve of bonds describes how the interest rate or cost of borrowing changes with bonds of different maturity.
A normal yield curve is a rising or positive yield curve is the normal shape of the yield curve with yields rising as the maturity of the bond lengthens. This means that people expect the economy to grow in the future and inflation to accompany this growth so longer maturity bonds must add a risk premium to the price. Investors demand compensation for holding long-term securities because of future uncertainties
An inverted yield curve or falling yield curve happens when investors expect the growth of the economy to decline in the future. In the past, this shape has predicted future recessions. It has also predicted that the central bank will cut short-term interest rates in the near future.
A flat yield curve (or humped yield curve) is uncommon and signals uncertainty among investors about what will happen to the economy in the future.
When the whole yield curve shifts higher this usually means that investors are more worried about inflation in the future. Shifting downwards signals an improved outlook for inflation.
In Thailand the Thai Bond Market Association (ThaiBMA) founded in 1994 is an important organization with many responsibilities. It is "a self-regulatory organization (SRO) for a fair and efficient operation of the bond market" and is also an information center and plays an important role in developing Thailand's bond market as well as acting as a "Bond Pricing agency for the industry."
Diagram on right above is of the three kinds of yield curves described above.
stock - owning a small part of a company or a stock "share" of the company (See Wikipedia) หุ้น
bond - a formal contract to repay borrowed money with interest at fixed intervals, a paper certificate is issued much like a stock certificate (See Wikipedia) พันธบัตร
principal - the amount of money borrowed in a loan เงินต้น
interest - payments made for the use of another's money for a period of time ดอกเบี้ย
source - where something comes from, someone who gives you something you need ต้นกำเนิด, แหล่งกำเนิด, ต้นทาง, แหล่งต้นทาง
funding - money to use for a project given by someone (government, company, organization, individual) การให้เงินทุน
balance sheet - report showing financial state of a company at a point in time (assets + money owed (liabilities) + owner's equity (current value to owners))
asset - a thing of value owned by a company or household such as property. money, or the right to receive payments in the future สินทรัพย์
liability - debt, an amount of money that a company or household owes to another หนี้สิน
owner's equity - the current value of a company calculated by: assets - liabilities, also known as "equity" or "net worth" ส่วนของเจ้าของ
maturity - the length of life of a bond, the length of time a bond exists for (example: bonds with maturities of 10 years)
maturity date - the time when the money borrowed with a bond is repaid, the end of the bond (note: sometimes "maturity" means this too)
bondholders - investors who own bonds
coupon - the rate of interest to a bond owner (See Wikipedia)
inverse (noun) - the opposite สิ่งที่ตรงกันข้าม
inversely related to Y - is the opposite of Y อย่างตรงกันข้าม Y
yield - yield of a bond, the interest rate of the bond, the annual income from a bond expressed as a percentage of the current market price of the bond, the annual coupon of the bond divided by the market price of the bond (See The Economist glossary)
yield curve - the curve that describes how the interest rate or cost of borrowing changes on bonds of different maturity (See The Economist Glossary and Wikipedia)
normal yield curve - a rising or positive yield curve with yields rising as the maturity of the bond lengthens, people expect the economy to grow in the future and inflation to accompany this growth so longer maturity bonds must add a risk premium to the price, investors demand compensation for holding long-term securities because of future uncertainties (See Wikipedia)
flat yield curve - signals uncertainty among investors about what will happen to the economy in the future, not common (See Wikipedia)
invert (verb) - put in the opposite position, turn upside down, reverse คว่ำ, พลิกกลับ, สับเปลี่ยนที่กัน
inverted yield curve - falling yield curve, when investors expect the growth of the economy to decline in the future, in the past this shape has predicted future recessions, has also predicted that the central bank will cut short-term interest rates in the near future (See Wikipedia)
X signals Y - X means that Y is true
outlook - an idea about what the situation will be in the future
Thai Bond Market Association (ThaiBMA) - "a self-regulatory organization (SRO) for a fair and efficient operation of the bond market and to be an information center for the Thai bond market. It also plays functional roles on market development, market convention and standards and being Bond Pricing agency for the industry," "in 1994 started as the Bond Dealers Club (BDC) under the Association of Securities Companies, played roles as the first and only organized secondary market for bonds, introduced an electronic bond trading system called 'Bondnet' for the first time in the history of the Thai bond market" (See website)
SRO - self-regulating organisation, a non-government organization (NGO) with legal authority to regulate its own members through rules for fair, ethical and efficient practices, in the US the NASDAQ stock exchange is a self-regulating organisation (Source: Investorwords, also see Wikipedia)
About the author
- Writer: Jon Fernquest
Position: Assistent Manager Educational services