Section Four

Bonds and Other Fixed-Income Securities

BONDS AND OTHER FIXED-INCOME SECURITIES

Bonds and related fixed-income securities are essentially loans or IOUs issued by a wide range of borrowers, including governments and government agencies, public and private companies, and various financial intermediaries. The term fixed income derives from the constant, predictable nature of payments you receive. Depending on the terms of the security, specific amounts of money may be paid as interest. For non-interest-bearing securities, the money you receive is the difference between the security’s purchase price, called its original issue discount (OID), and its face value. Face value is the amount returned to you if you hold the bond until its maturity date.

To help you understand this complicated market, Chapter Fourteen examines the seven key elements that distinguish bonds from each other, and from the now familiar world of stocks. Having set out a conceptual framework in Chapter Fourteen, Chapter Fifteen gives an overview of the most important segments of the bond market. By the end of this section, you will have a clear understanding of who invests in these markets, how investments are made, and the major advantages and disadvantages of various fixed-income securities.