Tuesday, May 3, 2016

What are Investments, Loans, Bonds and US Treasuries?

In the financial world, there are different terminologies to which we as an investor or analyst or finance related person should be familiar. It helps to understand the scenario in a better way, where these terms are used. We will discuss here few financial jargons. Let’s have a look on what the investments, loans, bonds and US Treasuries are.

Investment is basically the amount of money, spent today with the expectation to get a return from it at some future time. In other word, investment is the capital or money presently put in some financial instruments or other class of assets with the expectation of getting the profitable returns over a period. Other class of assets could be property, stock, bond, financial derivatives, etc. The profitable returns could be in terms of income, dividend, coupon payment, income or the capital gain through the appreciation of the value of the instrument invested in. For example, a person buys a stock of $100 with the expectation that the stock price will rise in future and apart from that dividend will be given. If we assume that the person’s expectation comes true, then he gets profitable returns in terms of capital gain (through price appreciation) and dividend. Here the person has made an investment of $100.

 A loan is basically getting money from others with the commitment to pay a predetermined amount of money at the predetermined time. Here, two parties are involved. Those are the borrower and another is the lender. The borrower takes money from lenders. That taken amount is considered as a principal. Now a question is why lenders are interested to provide money to borrowers. The simple answer is to get the returns from them. This return is expressed in terms of interest. Lenders set the interest rate and the time for interest to be paid for extending the loan to borrowers. Borrowers have to pay these interest amounts at the prespecified time. And period is also associated with the loan. At the end of that period, borrowers have to pay the principal amount they have taken earlier. In this way, lenders get their original amount; principal and also the interest amount. This interest amount is the return for them to giving money to borrowers for a period as suggested by, university assignment help.
A bond is a financial instrument in which the bond issuer promises to the bondholder to pay a specified amount during the life of a bond and also pay the face value of the bond at the end of the life of the bond. The bond issuers are the persons who sell the bonds. The bondholders are the persons who buy them. There are 4 components associated with a bond as per taxation assignment help experts.

One is the current price of a bond. Each one bond has its specific price depending on the market situations and the bond characteristics.
Second is the coupon payment. It can be viewed as an interest component as in case of loan. The bond has a series of equal coupon payments. These are provided by the bond issuer to the bondholder at a fixed specified time. It can be provided annually till the life of the bond. Or it can be provided twice in a yeartill the life of the bond. Then it is called semiannual coupon payment.
Face value is the next component. It is the amount, provided at the end of the life of the bond. It is prespecified.
Last one is the maturity period. It is the life of a bond.

For example, Company ABC has issued a bond at the selling price of $980 with a face value of $1,000 and maturity of 5 years. It has the coupon rate of 10%, paid annually. This is a structure of a bond.Thecoupon rate is always provided relative to face value. So, here the coupon amount will be $100 (=$1,000*0.10). Bondholder has to presently pay $980 and he will get $100 each year as coupon payment for 5 years. Apart from that, he will get the face value of $1,000 at the end of the fifth year.Since bond provides the fixed returns those are prespecified, so bonds are also called fixed income securities. The risk associated with bonds is that the bond issuers can be defaulters and can’t pay/repay the amount that is supposed to be. Then bondholders get nothing. The level of risk depends on who has issued the bond. Bonds can be issued by government, municipality, federal agency and corporations.

US Treasuries are the bonds issued by the US government. The risk of default explained earlier is zero in case of Treasuries. Government never fails to pay on Treasuries as the government can print more dollars if it is with insufficient money. This is the reason for why these US Treasuries are considered as a risk free rate. US government issues Treasury Bills (abbreviated as T-Bills), notes and bonds. These Treasury Bills are of the maturity of less than a year. The Notes are of the maturity between one and ten years. Government bonds are of the maturity of more than ten years.