Introduction to Fixed Income Products
A bond is a loan made tradeable. The issuer borrows, pays periodic interest, and returns the principal at maturity. The holder is a creditor, not an owner, which is the source of every difference from equity.
Creditors rank ahead of shareholders and have a contractual claim rather than a residual one. That means lower expected return and much more certainty, which is the trade the whole asset class rests on.
Anatomy of a bond
Face value repaid at maturity, conventionally 100. Coupon, the periodic interest, quoted as a percentage of face. Maturity, when principal is returned. Issuer, which determines the credit risk.
A 5% coupon bond with 10 years to maturity pays 5 per year per 100 of face, then 100 at the end.
The instrument families
Government bonds. Sovereign debt in the issuer's own currency is treated as the risk-free benchmark, since a government controlling its own printing press cannot be forced into nominal default. Bills are short and issued at a discount with no coupon; notes and bonds are longer and pay coupons.
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