(Last Updated On: 10/09/2019)
What is bond, really? How does bond work?
Bond is a fixed income securities. If issued by private sector, it is known as corporate bond whereas government bond is also known as Malaysia Government Securities (MGS).
Bond is considered a debt instruments to raise capital to finance expenditure or working capital, without diluting the ownership rights (unlike shares).
Bonds are usually risk free investment, especially for government bonds unless you are living in nation like Greece where government could default on its debt.
From investor perspective, they will lend an amount of money to the bond issuer, and in return they will get a predetermined rate of return (coupon payment, usually within 5 to 10 percent) from their capital annually/semi-annually/quarterly. In addition to this, the capital will be repaid to the investor when the bond ‘matures’, normally within 1 year for short-term bond (aka Treasury Bills) and 10 years for long-term bond (MGS) .
This final capital repayment actually be more or less than the initial capital invested, the former known as discount bond and the latter as premium bond. In short, investor is guaranteed to be compensated in periodical coupon payment in addition to the value of discount of the bond ‘price’.