Bonds are fixed-income securities issued by governments or corporations to borrow money from investors. Essentially, a bond is a loan that the investor grants to the issuer. The issuer pays interest, also known as a coupon, to the investors for the borrowed money and commits to repaying the face value at a specific point in the future.
Bonds are a popular form of investment issued by governments and companies. They offer investors a stable income and are a relatively safe asset class compared to other investment forms such as stocks or commodities. There are two types of bonds: government bonds and corporate bonds. Government bonds are issued by governments, while corporate bonds are issued by companies.
Government bonds are bonds issued by governments to finance their expenditures. Government bonds are generally considered safe when issued by a government that is seen as reliable and creditworthy. Government bonds have a fixed term, a fixed interest rate, and a fixed repayment at the end of the term. The term of government bonds can range from a few months to several decades.
The yield of government bonds depends on various factors, including the creditworthiness of the issuer, inflation expectations, and general interest rate developments. Generally, government bonds offer lower yields than corporate bonds, as they are considered safer. However, the yield of government bonds can vary from country to country, depending on creditworthiness and political stability.
Corporate bonds are issued by companies to raise capital. Unlike government bonds, corporate bonds are associated with higher risks as the default risk is higher than that of government bonds. The yield of corporate bonds is usually higher than that of government bonds as investors are taking on higher risk.
Corporate bonds also have a fixed term and a fixed interest rate. The interest rate is set at the time of issuance and remains unchanged during the term of the bond. The repayment at the end of the term is usually higher than the original investment amount.
The interest rate of a bond is the percentage of the nominal value that the issuer pays to the investor. For example, if a bond has an interest rate of 5% and a nominal value of 1,000 euros, the investor receives 50 euros in interest payments per year. Interest rates may vary depending on the type of bond, maturity, and issuer.
The maturity of a bond refers to the time when the issuer must repay the principal to the investor. Most bonds have a fixed term, usually ranging from a few months to several decades. When the bond matures, the issuer must repay the principal to the investor, and the interest payments end.
The rating refers to the evaluation of the creditworthiness of the issuer of the bond by rating agencies. The rating indicates how high the default risk of the issuer is and how likely it is that they will be able to repay the interest payments and the capital. The most well-known rating agencies are Moody's, Standard & Poor's, and Fitch. These agencies assess the creditworthiness of issuers based on various factors such as financial stability, payment history, and the general economic situation of the issuer. The rating is usually given as a letter or number code. For example, the best credit rating from Moody's and S&P has the code AAA or Aaa, while the worst rating has the code D. The rating is an important factor in deciding whether to invest in a bond. Investors should be able to evaluate the risk of the issuer and their ability to repay the borrowed capital and interest before making an investment.
The issuer of a bond is the company or government that issued the bond. The issuer is responsible for the repayment of the borrowed capital and interest. Therefore, investors should consider the issuer's rating and financial stability before investing in a bond.
Trading with FXFlat
- Global Product Diversity
Choose from bonds across a wide range of sectors, including energy, technology, financials, telecommunications, utilities and many more. You can choose from corporate bonds worldwide, as well as U.S. Treasuries, U.S. municipal bonds, and non-U.S. government bonds.
- Bond Scanner
Interactive Brokers Bond Scanner helps you find the right bond for you. Choose between maturity periods, coupon rate, ratings, currencies and additional criteria.
- Bid and Ask Quotations
In the brokerage account, bid and ask prices for US corporate bonds are available for active trading
- Smart Routing
Bond orders are routed to additional liquidity providers, such as major international banks, as well as to multiple bond trading venues. These include Bloomberg ALLQ, Tradeweb Direct, ICE BondPoint, ICE MuniCenter and NYSE Bonds.