The features of a bond

What is the difference between a loan and a bond?

Both are borrowing with a promise to pay interest and repay principal. A loan is a private agreement, usually between a borrower and a bank. A bond is standardized and built to trade, so many investors can hold slices of the same debt.

Together they are fixed-income instrument s. All of them are liabilities of the borrower, but not every liability is fixed income: accounts payable, deferred revenue and taxes payable are obligations to suppliers, customers and the tax authority, not borrowing from investors. Leases and pensions resemble debt but are covered elsewhere.

A bond differs from a share in three ways: its cash flows are committed by contract, it carries no vote, and it ranks higher when the issuer fails.

What are the six features of a bond?

Every bond is described by the same six items, laid out on its term sheet. Here is one we will use throughout.

Term sheet line	Feature	In one sentence
Issuer: Halvorsen Shipping ASA	Issuer	The legal entity that owes every payment.
Maturity: 7 years from settlement	Maturity	The date of the final payment.
Principal: USD 500 million	Par (face value)	What is repaid at maturity.
Coupon: 4.50%, paid semiannually	Coupon rate and frequency	Annual interest = rate × par, split evenly across the year’s payments.
Ranking: senior unsecured	Seniority	Place in the queue in bankruptcy.
Call: none	Contingency provision	A clause that changes the cash flows if an event happens.

Bond (fixed-income security)a tradable loan with committed cash flows

• Issuer Use it who owes every payment
• Maturity Memorize date of the final payment
• Principal (par, face value) Memorize the amount repaid; coupons are measured on it
• Coupon rate and frequency Memorize interest paid, and how often
  • Fixed coupon same payment every period
  • Floating-rate note MRR (resets) + credit spread (fixed)
  • Zero-coupon bond no coupons; the discount to par is the interest
• Seniority Memorize place in the queue in bankruptcy
• Contingency provisions Use it embedded call, put or conversion option

The issuer can be any legal entity: a national or local government, a supranational such as the World Bank, a government-owned agency, a corporation or a special purpose entity that holds loans. Sovereign bonds are backed by taxing power, so they are usually the safest in their own market.

Maturity, tenor and principal

The maturity is the date of the final payment. The tenor is the time remaining until it. Securities are classed by their tenor when first issued.

Fixed-income securityclassified by tenor when first issued

• Money market security Memorize one year or less (T-bills, commercial paper)
• Capital market security Memorize longer than one year
• Perpetual bond Use it no maturity date; still debt, not equity

Money market securities have a tenor of one year or less at issue (Treasury bills, commercial paper). Capital market securities are longer. A perpetual bond has no maturity date but is still debt: its cash flows are set by contract, it has no votes and it ranks ahead of equity.

The principal (also par value or face value) is the amount the issuer agrees to repay. Some debt repays principal in pieces, as a mortgage does, rather than as one lump sum at maturity.

How do you calculate a coupon payment?

The coupon rate is applied to par, never to the price the bond trades at. The annual coupon is split evenly across the payment dates.

$$C = \frac{c \times \text{Par}}{m}$$

Here c is the coupon rate and m is the number of payments a year (1, 2, 4 or 12). Corporate bonds usually pay semiannually.

How does a floating-rate note pay interest?

A floating-rate note (FRN) has a coupon that resets. The coupon rate is a market reference rate (MRR) plus a credit spread .

$$C = \frac{(\text{MRR} + s) \times \text{Par}}{m}$$

The MRR is a standard short-term borrowing rate for the highest-quality borrowers, and it resets each period from the market. The spread s is set at issue, is quoted in basis points (hundredths of a percentage point) and usually stays constant. The stronger the issuer, the smaller the spread.

A zero-coupon bond (or pure discount bond) pays no coupons. It is bought below par and repaid at par, and the gap is all the interest, received in one go at maturity.

Exam tip FRN: the market part resets, the issuer part stays. Zero: the discount is the interest.

What are seniority and contingency provisions?

Seniority is a claim’s priority in bankruptcy or liquidation. Senior debt is paid before subordinated debt (also called junior debt), which is paid only once senior claims are satisfied. Lesson 3 adds security to the ranking.

A contingency provision allows an action if an event occurs. The most common are embedded option s: the right to call (redeem early), put (sell back) or convert to shares. They cannot be traded apart from the bond. Their value is the price of the bond with the option minus the price of an otherwise identical bond without it. The next module builds on this.

Go deeper Why governments mostly issue bonds, not loans

National and local governments are usually financed by bonds rather than bank loans. They are large, long-lived borrowers, and bonds let them reach many investors at once. The main exception is lending from supranational bodies such as the International Monetary Fund (IMF), which is made by private agreement and is a loan.

Go deeper Perpetual bonds in practice

Public-sector entities issued the first perpetual bonds, and some local authorities still do. Banks also issue perpetual bonds to meet regulatory capital requirements. Many of these can be called by the issuer or converted into equity if the bank is in trouble, which links them to the contingency provisions of the next module.

Go deeper Why survey-based reference rates were replaced

Floating rates were once set by polling banks on what they would charge each other (Libor). A poll can be nudged. Reference rates now follow the average of rates observed in real market transactions, which is much harder to manipulate. For the exam, remember that the MRR is a market-observed rate that resets each period.