What happens on the issuance date in a fixed income security?
Answers
The most common type of fixed income securities are bonds. A bond is an investment product that is issued by corporate and governmental entities to raise capital to finance and expand their operations and projects. The borrower, or issuer, promises to pay interest, called the coupon, on an annual or semi-annual basis until a set date. The issuer returns the principal amount, also called the face or par value, to the investor on the maturity date.
Bonds can be broken down into corporate bonds and government bonds. Corporate bonds are issued by companies and can either be investment grade on non-investment grade bonds. Investment grade bonds are issued by stable companies with a low risk of default and, therefore, have lower interest rates than non-investment grade bonds. Non-investment grade bonds, also known as junk bonds or high-yield bonds, have very low credit ratings due to a high probability of the corporate issuer defaulting on its interest payments. For this reason, investors in high-yield bonds typically require a higher rate of interest for taking on the higher risk posed by these debt securities. Corporate bonds trade on major exchanges, and have $1,000 par values.
The municipal bond is an example of a government bond. Municipal bonds are issued by states, cities, and counties to fund capital projects, such as building roads, schools, and hospitals. The interest earned from these bonds are tax exempt from federal income tax. In addition, a muni bond investor may also have his interest earned exempt from state and local taxes if he resides in the state where the bond is issued. The muni bond has several maturity dates in which a portion of the principal comes due on a separate date until the entire principal is repaid. Munis have par values of $5,000 and trade over-the-counter.