From the course: Understanding Capital Markets

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Investing in bonds

Investing in bonds

From the course: Understanding Capital Markets

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Investing in bonds

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- [Instructor] In addition to the five main features of bonds, there's some special characteristics for bonds that you may run across. These are zero coupons and call provisions. Zero coupon bonds have, as the name implies, a zero coupon rate. Basically, instead of paying interest the bonds are issued at a substantial discount below the par face value. So you might buy a bond that promises to pay you $1,000 in 10 years and you pay $600 for it today. The other main feature you'll want to be aware of is a call provision. A call provision, if it exists, gives the company that issued the bond the option, that is the right but not the obligation, to redeem that bond before the maturity date. For example, let's pretend that interest rates decline. Well the firm may want to pay off their bonds early and reissue at a more favorable interest rate. So, if the interest rates fall to 5% and the company has a bond paying 8%, they…

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