Debt is an important part of the financial world, and it is crucial that debt issuers understand the risks associated with their products. A debt issue refers to a financial obligation that allows the issuer to raise funds by promising to repay the lender at a certain point in the future and in accordance with the terms of the contract. The most common type of debt security is a bond, which entitles holders to fixed payments over time until maturity, when they are repaid principal and interest. Bonds can be issued by corporations, municipalities, or governments.When evaluating a potential bond investment, investors should consider several factors including:
credit quality of issuer;
coupon rate;
term or maturity date;
redemption features; and
market conditions.
Credit quality reflects how likely it is that an issuer will be able to make timely payments on its debts. The higher the rating from agencies like Moody's or Standard & Poor's ,the lower risk investors assume . Coupon rate is simply annual interest payment as a percentage of face value . Term/maturity indicates how long it will take for investors receive their original investment back plus interest . Redemption features specify when and how bonds may be redeemed before maturity . Market conditions include prevailing interest rates ,inflation expectations ,and overall economic outlook .All things being equal, when considering two otherwise identical bonds - one with a shorter term versus one with longer term -the longer-term bond would offer less yield because there is more certainty about getting repaid sooner; this trade-off between risk and return is known as duration mismatch.
