DEFINITION OF BOND Whenever funds being borrowed can be obtained from a small number of sources, mortgages or notes are usually used.. However, when large amounts are needed, an entity may have to borrow from the general investing public through the use of a bond issue. Bonds are used primarily by corporations and government units. A bond is a formal unconditional promise, made under seal, to pay a specified sum of money at a determinable future date, and to make periodic interest payment at a stated rate until the principal sum is paid In simple language, a bond is a contract of debt whereby one party called the issuer borrows funds from another party called the investor. A bond is evidenced by a certificate and the contractual agreement between the issuer and investor is contained in a document known as "bond indenture". Term and serial bonds Term bonds are bonds with a single date of maturity. Term bonds may require the issuing entity to establish a sinking fund to provide adequate money to retire the bond issue at one time. Serial bonds are bonds with a series of maturity dates instead of a single one. In other words, serial bonds allow the issuing entity to retire the bonds by installments. Secured and unsecured bonds Mortgage bonds are bonds secured by a mortgage on real properties. Collateral trust bonds are bonds secured by shares and bonds f other corporation. Debenture bonds are unsecured or bonds without collateral security. Registered and bearer bonds Registered bonds require the registration of the name of the bondholders on the books of the corporation. If the bondholder sells a bond, the old bond certificate is surrendered to the entity and a new bond certificate is issued to the buyer. Interest is periodically paid by the issuing entity to bondholders of record. Coupon or bearer bonds are unregistered bonds in the sense that the name of the bondholder is not recorded on the entity books. The issuing entity does not maintain a record of who own the bonds at any point in time. Thus, interest on coupon bonds is paid to the person submitting a detachable interest coupon. Other types of bonds Convertible bonds are bonds that can be exchanged for shares of the issuing entity. Callable bonds are bonds which may be called in for redemption prior to the maturity date. Guaranteed bonds are bonds issued whereby another party promises to make payment if the borrower fails to do so. Junk bonds are high-risk, high-yield bonds issued by entities that are heavily indebted or otherwise in weak financial condition. Zero-coupon bonds are bonds that pay no interest but the bonds offer a return in the form of a "deep discount" or huge discount from the face amount. Features of bond issue a. A bond indenture or deed of trust is the document which shows in detail the terms of the loan and the rights and duties of the borrower and other parties to the contract. b Bond certificates are used. Each bond certificate represents a portion of the total loan. The usual minimum denomination in business practice is P1,000, although smaller denominations may be issued occasionally. If property is pledged as security for the loan, a trustee is named to hold title to the property serving as security. The trustee acts as the representative of the bondholders and is usually a bank or trust entity. d. A bank or trust entity is usually appointed as registrar or disbursing agent. The borrower deposits interest and principal payments with the disbursing agent, who then distributes the funds to the bondholders. Contents of bond indenture The bond indenture is the contract between the bondholders and the borrower or issuing entity. Normally, the bond indenture contains the following items: a. Characteristics of the bonds b. Maturity date and provision for repayment c. Period of grace allowed to issuing entity d. Establishment of a sinking fund and the periodic deposit therein. e. Deposit to cover interest payments f. property, such as taxes, insurance coverage, collection of interest or dividends on collaterals & Access to corporate books and records of trustee h. Certification of bonds by trustee i. Required debt to equity ratio i Minimum working capital to be maintained, if any.
