Bonds...or debt?
Let�s consider company X. X needs 100 millions $ in capital and can borrow the amount from a commercial bank which will collect interests on that loan in addition to the original 100 millions. However, X has another option to finance itself, it can use bonds. This is done by the assistance of an investment bank that will sell bonds publicly as following: the 100 millions will be divided into 100 000 bonds for example, each worth 1000$, and these bonds are then sold to public investors. That way, company X has borrowed the 100 millions from the public investors and not a single entity such as a commercial bank.
Company X, called the issuer of the bond, must pay the investors something extra for the privilege of using their money. This "extra" comes in the form of coupon which is an interest payment made at a predetermined rate and schedule. At the maturity date, company X has to repay the original amount borrowed, known as the principal or face value.
In our example, the face value is $1000, and if the coupon is 7%, with a maturity of 10 years, each public investor will receive 70$ per year for 10 years. When the bond matures at the end of the tenth year, each will get back the original 1000.
The bond market is also called fixed income market because the bondholder receives fixed periodic payments.
Bonds rating
It is very important to examine thoroughly any bond issuer to estimate the risk of payments default. As a matter of fact, bonds are rated by credit rating companies such as Standard and Poor or Moody�s and before any decision, investors should examine carefully the current rating of a given bond.
The following table summarizes the rating symbols of Standard and Poor�s:
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