In nance, a bond s an nstrument of ndebtedness of the bond ssuer to the
hoders. It s a debt securty, under whch the ssuer owes the hoders a debt and, dependng on the terms of the bond, s obged to pay them nterest (the coupon) and/or to repay the prncpa at a ater date, termed the maturty date.|1| Interest s usuay payabe at xed ntervas (semannua, annua, sometmes monthy). Very often the bond s negotabe, .e. the ownershp of the nstrument can be transferred n the secondary market. Ths means that once the transfer agents at the bank medaon stamp the bond, t s hghy qud on the second market. |2| Thus a bond s a form of oan or IOU (sounded "I owe you"): the hoder of the bond s the ender (credtor), the ssuer of the bond s the borrower (debtor), and the coupon s the nterest. Bonds provde the borrower wth externa funds to nance ong-term nvestments, or, n the case of government bonds, to nance current expendture. Certcates of depost (CDs) or short term commerca paper are consdered to be money market nstruments and not bonds: the man dherence s n the ength of the term of the nstrument. Bonds and stocks are both securtes, but the ma|or dherence between the two s that (capta) stockhoders have an equty stake n the company (.e. they are nvestors), whereas bondhoders have a credtor stake n the company (.e. they are enders). Beng a credtor, bondhoders have absoute prorty and w be repad before stockhoders (who are owners) n the event of bankruptcy.|3| Another dherence s that bonds usuay have a dened term, or maturty, after whch the bond s redeemed, whereas stocks are typcay outstandng ndentey. An excepton s an rredeemabe bond, such as Consos, whch s a perpetuty, .e. a bond wth no maturty. Issuance|edt| Bonds are ssued by pubc authortes, credt nsttutons, companes and supranatona nsttutons n the prmary markets. The most common process for ssung bonds s through underwrtng. When a bond ssue s underwrtten, one or more securtes rms or banks, formng a syndcate, buy the entre ssue of bonds from the ssuer and re-se them to nvestors. The securty rm takes the rsk of beng unabe to se on the ssue to end nvestors. Prmary ssuance s arranged by bookrunners who arrange the bond ssue, have drect contact wth nvestors and act as advsers to the bond ssuer n terms of tmng and prce of the bond ssue. The bookrunner s sted rst among a underwrters partcpatng n the ssuance n the tombstone ads commony used to announce bonds to the pubc. The bookrunners' wngness to underwrte must be dscussed pror to any decson on the terms of the bond ssue as there may be mted demand for the bonds. In contrast, government bonds are usuay ssued n an aucton. In some cases both members of the pubc and banks may bd for bonds. In other cases ony market makers may bd for bonds. The overa rate of return on the bond depends on both the terms of the bond and the prce pad.|4| The terms of the bond, such as the coupon, are xed n advance and the prce s determned by the market. In the case of an underwrtten bond, the underwrters w charge a fee for underwrtng. An aternatve process for bond ssuance, whch s commony used for smaer ssues and avods ths cost, s the prvate pacement bond. Bonds sod drecty to buyers and may not be tradeabe n the bond market. |5| Hstorcay an aternatve practce of ssuance was for the borrowng government authorty to ssue bonds over a perod of tme, usuay at a xed prce, wth voumes sod on a partcuar day dependent on market condtons. Ths was caed a tap ssue or bond tap.|6| Features|edt| Prncpa|edt| Nomna, prncpa, par or face amount s the amount on whch the ssuer pays nterest, and whch, most commony, has to be repad at the end of the term. Some structured bonds can have a redempton amount whch s dherent from the face amount and can be nked to performance of partcuar assets. Maturty|edt| The ssuer has to repay the nomna amount on the maturty date. As ong as a due payments have been made, the ssuer has no further obgatons to the bond hoders after the maturty date. The ength of tme unt the maturty date s often referred to as the term or tenor or maturty of a bond. The maturty can be any ength of tme, athough debt securtes wth a term of ess than one year are generay desgnated money market nstruments rather than bonds. Most bonds have a term of up to 30 years. Some bonds have been ssued wth terms of 50 years or more, and hstorcay there have been some ssues wth no maturty date (rredeemabes). In the market for Unted States Treasury securtes, there are three categores of bond maturtes: short term (bs): maturtes between one to ve year; (nstruments wth maturtes ess than one year are caed Money Market Instruments) medum term (notes): maturtes between sx to tweve years; ong term (bonds): maturtes greater than tweve years. Coupon|edt| The coupon s the nterest rate that the ssuer pays to the hoder. Usuay ths rate s xed throughout the fe of the bond. It can aso vary wth a money market ndex, such as LIBOR, or t can be even more exotc. The name "coupon" arose because n the past, paper bond certcates were ssued whch had coupons attached to them, one for each nterest payment. On the due dates the bondhoder woud hand n the coupon to a bank n exchange for the nterest payment. Interest can be pad at dherent frequences: generay sem-annua, .e. every 6 months, or annua. Bond ssued by the Dutch East Inda Company n 1623 Yed|edt| The yed s the rate of return receved from nvestng n the bond. It usuay refers ether to the current yed, or runnng yed, whch s smpy the annua nterest payment dvded by the current market prce of the bond (often the cean prce), or to the yed to maturty or redempton yed, whch s a more usefu measure of the return of the bond, takng nto account the current market prce, and the amount and tmng of a remanng coupon payments and of the repayment due on maturty. It s equvaent to the nterna rate of return of a bond. Credt Ouaty|edt| The "quaty" of the ssue refers to the probabty that the bondhoders w receve the amounts promsed at the due dates. Ths w depend on a wde range of factors. Hgh-yed bonds are bonds that are rated beow nvestment grade by the credt ratng agences. As these bonds are more rsky than nvestment grade bonds, nvestors expect to earn a hgher yed. These bonds are aso caed |unk bonds. Market Prce|edt| The market prce of a tradeabe bond w be nuenced amongst other thngs by the amounts, currency and tmng of the nterest payments and capta repayment due, the quaty of the bond, and the avaabe redempton yed of other comparabe bonds whch can be traded n the markets. The prce can be quoted as cean or drty. ("Drty" ncudes the present vaue of a future cash ows ncudng accrued nterest. "Drty" s most often used n Europe. "Cean" does not ncude accrued nterest. "Cean" s most often used n the U.S.|7| ) The ssue prce at whch nvestors buy the bonds when they are rst ssued w typcay be approxmatey equa to the nomna amount. The net proceeds that the ssuer receves are thus the ssue prce, ess ssuance fees. The market prce of the bond w vary over ts fe: t may trade at a premum (above par, usuay because market nterest rates have faen snce ssue), or at a dscount (prce beow par, f market rates have rsen or there s a hgh probabty of defaut on the bond). Others|edt| Indentures and Covenants - An ndenture s a forma debt agreement that estabshes the terms of a bond ssue, whe covenants are the causes of such an agreement. Covenants specfy the rghts of bondhoders and the dutes of ssuers, such as actons that the ssuer s obgated to perform or s prohbted from performng. In the U.S., federa and state securtes and commerca aws appy to the enforcement of these agreements, whch are construed by courts as contracts between ssuers and bondhoders. The terms may be changed ony wth great dmcuty whe the bonds are outstandng, wth amendments to the governng document generay requrng approva by a ma|orty (or super-ma|orty) vote of the bondhoders. Optonaty: Occasonay a bond may contan an embedded opton; that s, t grants opton-ke features to the hoder or the ssuer: Caabty - Some bonds gve the ssuer the rght to repay the bond before the maturty date on the ca dates; see ca opton. These bonds are referred to as caabe bonds. Most caabe bonds aow the ssuer to repay the bond at par. Wth some bonds, the ssuer has to pay a premum, the so-caed ca premum. Ths s many the case for hgh-yed bonds. These have very strct covenants, restrctng the ssuer n ts operatons. To be free from these covenants, the ssuer can repay the bonds eary, but ony at a hgh cost. Putabty - Some bonds gve the hoder the rght to force the ssuer to repay the bond before the maturty date on the put dates; see put opton. These are referred to as retractabe or putabe bonds. ca dates and put dates-the dates on whch caabe and putabe bonds can be redeemed eary. There are four man categores. A Bermudan caabe has severa ca dates, usuay concdng wth coupon dates. A European caabe has ony one ca date. Ths s a speca case of a Bermudan caabe. An Amercan caabe can be caed at any tme unt the maturty date. A death put s an optona redempton feature on a debt nstrument aowng the benecary of the estate of a deceased bondhoder to put (se) the bond (back to the ssuer) at face vaue n the event of the bondhoder's death or ega ncapactaton. Aso known as a "survvor's opton". snkng fund provson of the corporate bond ndenture requres a certan porton of the ssue to be retred perodcay. The entre bond ssue can be qudated by the maturty date. If that s not the case, then the remander s caed baoon maturty. Issuers may ether pay to trustees, whch n turn ca randomy seected bonds n the ssue, or, aternatvey, purchase bonds n open market, then return them to trustees. Types|edt| Bond certcate for the state of South Carona ssued n 1873 under the state's Consodaton Act. Raroad obgaton Moscow-Kev-Voronezh The foowng descrptons are not mutuay excusve, and more than one of them may appy to a partcuar bond. Fxed rate bonds have a coupon that remans constant throughout the fe of the bond. A varaton are stepped-coupon bonds, whose coupon ncreases durng the fe of the bond. Foatng rate notes (FRNs, oaters) have a varabe coupon that s nked to a reference rate of nterest, such as LIBOR or Eurbor. For exampe the coupon may be dened as three month USD LIBOR + 0.20%. The coupon rate s recacuated perodcay, typcay every one or three months. Zero-coupon bonds (zeros) pay no reguar nterest. They are ssued at a substanta dscount to par vaue, so that the nterest s ehectvey roed up to maturty (and usuay taxed as such). The bondhoder receves the fu prncpa amount on the redempton date. An exampe of zero coupon bonds s Seres E savngs bonds ssued by the U.S. government. Zero-coupon bonds may be created from xed rate bonds by a nanca nsttuton separatng ("strppng oh") the coupons from the prncpa. In other words, the separated coupons and the na prncpa payment of the bond may be traded separatey. See IO (Interest Ony) and PO (Prncpa Ony). Hgh-yed bonds (|unk bonds) are bonds that are rated beow nvestment grade by the credt ratng agences. As these bonds are more rsky than nvestment grade bonds, nvestors expect to earn a hgher yed. Convertbe bonds et a bondhoder exchange a bond to a number of shares of the ssuer's common stock. These are known as hybrd nvestments, because they combne equty and debt features. Exchangeabe bonds aows for exchange to shares of a corporaton other than the ssuer. Inaton-ndexed bonds (nkers) (US) or Index-nked bond (UK), n whch the prncpa amount and the nterest payments are ndexed to naton. The nterest rate s normay ower than for xed rate bonds wth a comparabe maturty (ths poston brey reversed tsef for short-term UK bonds n December 2008). However, as the prncpa amount grows, the payments ncrease wth naton. The Unted Kngdom was the rst soveregn ssuer to ssue naton nked gts n the 1980s. Treasury Inaton-Protected Securtes (TIPS) and I-bonds are exampes of naton nked bonds ssued by the U.S. government. Recept for temporary bonds for the state of Kansas ssued n 1922 Other ndexed bonds, for exampe equty-nked notes and bonds ndexed on a busness ndcator (ncome, added vaue) or on a country's GDP. Asset-backed securtes are bonds whose nterest and prncpa payments are backed by underyng cash ows from other assets. Exampes of asset-backed securtes are mortgage-backed securtes (MBS's), coaterazed mortgage obgatons (CMOs) and coaterazed debt obgatons (CDOs). Subordnated bonds are those that have a ower prorty than other bonds of the ssuer n case of qudaton. In case of bankruptcy, there s a herarchy of credtors. Frst the qudator s pad, then government taxes, etc. The rst bond hoders n ne to be pad are those hodng what s caed senor bonds. After they have been pad, the subordnated bond hoders are pad. As a resut, the rsk s hgher. Therefore, subordnated bonds usuay have a ower credt ratng than senor bonds. The man exampes of subordnated bonds can be found n bonds ssued by banks, and asset-backed securtes. The atter are often ssued n tranches. The senor tranches get pad back rst, the subordnated tranches ater. Covered bonds are backed by cash ows from mortgages or pubc sector assets. Contrary to asset-backed securtes the assets for such bonds reman on the ssuers baance sheet. Perpetua bonds are aso often caed perpetutes or 'Perps'. They have no maturty date. The most famous of these are the UK Consos, whch are aso known as Treasury Annutes or Undated Treasures. Some of these were ssued back n 1888 and st trade today, athough the amounts are now nsgncant. Some utra-ong-term bonds (sometmes a bond can ast centures: West Shore Raroad ssued a bond whch matures n 2361 (.e. 24th century) are vrtuay perpetutes from a nanca pont of vew, wth the current vaue of prncpa near zero. Bearer bond s an omca certcate ssued wthout a named hoder. In other words, the person who has the paper certcate can cam the vaue of the bond. Often they are regstered by a number to prevent counterfetng, but may be traded ke cash. Bearer bonds are very rsky because they can be ost or stoen. Especay after federa ncome tax began n the Unted States, bearer bonds were seen as an opportunty to concea ncome or assets.|8| U.S. corporatons stopped ssung bearer bonds n the 1960s, the U.S. Treasury stopped n 1982, and state and oca tax-exempt bearer bonds were prohbted n 1983.|9| Regstered bond s a bond whose ownershp (and any subsequent purchaser) s recorded by the ssuer, or by a transfer agent. It s the aternatve to a Bearer bond. Interest payments, and the prncpa upon maturty, are sent to the regstered owner. A government bond, aso caed Treasury bond, s ssued by a natona government and s not exposed to defaut rsk. It s characterzed as the safest bond, wth the owest nterest rate. A treasury bond s backed by the "fu fath and credt" of the reevant government. For that reason, for the ma|or OECD countres ths type of bond s often referred to as rsk-free. Pacc Raroad Bond ssued by Cty and County of San Francsco, CA. May 1, 1865 Muncpa bond s a bond ssued by a state, U.S. Terrtory, cty, oca government, or ther agences. Interest ncome receved by hoders of muncpa bonds s often exempt from the federa ncome tax and from the ncome tax of the state n whch they are ssued, athough muncpa bonds ssued for certan purposes may not be tax exempt. Bud Amerca Bonds (BABs) are a form of muncpa bond authorzed by the Amercan Recovery and Renvestment Act of 2009. Unke tradtona US muncpa bonds, whch are usuay tax exempt, nterest receved on BABs s sub|ect to federa taxaton. However, as wth muncpa bonds, the bond s tax-exempt wthn the US state where t s ssued. Generay, BABs oher sgncanty hgher yeds (over 7 percent) than standard muncpa bonds. |10| Book-entry bond s a bond that does not have a paper certcate. As physcay processng paper bonds and nterest coupons became more expensve, ssuers (and banks that used to coect coupon nterest for depostors) have tred to dscourage ther use. Some book-entry bond ssues do not oher the opton of a paper certcate, even to nvestors who prefer them.|11| Lottery bonds are ssued by European and other states. Interest s pad as on a tradtona xed rate bond, but the ssuer w redeem randomy seected ndvdua bonds wthn the ssue accordng to a schedue. Some of these redemptons w be for a hgher vaue than the face vaue of the bond. War bond s a bond ssued by a country to fund a war. Sera bond s a bond that matures n nstaments over a perod of tme. In ehect, a $100,000, 5-year sera bond woud mature n a $20,000 annuty over a 5-year nterva. Revenue bond s a speca type of muncpa bond dstngushed by ts guarantee of repayment soey from revenues generated by a speced revenue-generatng entty assocated wth the purpose of the bonds. Revenue bonds are typcay "non-recourse", meanng that n the event of defaut, the bond hoder has no recourse to other governmenta assets or revenues. Cmate bond s a bond ssued by a government or corporate entty n order to rase nance for cmate change mtgaton- or adaptaton-reated pro|ects or programmes. Dua currency bonds |12| Reta bond s a type of corporate bond wth very ow nterest rates mosty desgned for ordnary nvestors n the ndustry.|13| They have become partcuary attractve snce the London Stock Exchange (LSE) aunched an order book for reta bonds.|14| Soca mpact bonds are an agreement for pubc sector enttes to pay back prvate nvestors after meetng vered mproved soca outcome goas that resut n pubc sector savngs from nnovatve soca program pot pro|ects. Foregn currences|edt| Some companes, banks, governments, and other soveregn enttes may decde to ssue bonds n foregn currences as t may appear to be more stabe and predctabe than ther domestc currency. Issung bonds denomnated n foregn currences aso gves ssuers the abty to access nvestment capta avaabe n foregn markets. The proceeds from the ssuance of these bonds can be used by companes to break nto foregn markets, or can be converted nto the ssung company's oca currency to be used on exstng operatons through the use of foregn exchange swap hedges. Foregn ssuer bonds can aso be used to hedge foregn exchange rate rsk. Some foregn ssuer bonds are caed by ther ncknames, such as the "samura bond". These can be ssued by foregn ssuers ookng to dversfy ther nvestor base away from domestc markets. These bond ssues are generay governed by the aw of the market of ssuance, e.g., a samura bond, ssued by an nvestor based n Europe, w be governed by |apanese aw. Not a of the foowng bonds are restrcted for purchase by nvestors n the market of ssuance. Eurodoar bond, a U.S. doar-denomnated bond ssued by a non-U.S. entty outsde the U.S|15| Bakava bond, a bond denomnated n Turksh Lra and ssued by a domestc or foregn entty n the Turksh market|16| Yankee bond, a US doar-denomnated bond ssued by a non-US entty n the US market Kangaroo bond, an Austraan doar-denomnated bond ssued by a non- Austraan entty n the Austraan market Mape bond, a Canadan doar-denomnated bond ssued by a non-Canadan entty n the Canadan market Samura bond, a |apanese yen-denomnated bond ssued by a non-|apanese entty n the |apanese market Urdash bond, a non-yen-demonnated bond sod to |apanese reta nvestors. Shbosa Bond, a prvate pacement bond n |apanese market wth dstrbuton mted to nsttutons and banks. Shogun bond, a non-yen-denomnated bond ssued n |apan by a non- |apanese nsttuton or government|17| Budog bond, a pound sterng-denomnated bond ssued n London by a foregn nsttuton or government. Matroshka bond, a Russan roube-denomnated bond ssued n the Russan Federaton by non-Russan enttes. The name derves from the famous Russan wooden dos, Matroshka, popuar among foregn vstors to Russa Arrang bond, a Korean won-denomnated bond ssued by a non-Korean entty n the Korean market|18| Kmch bond, a non-Korean won-denomnated bond ssued by a non-Korean entty n the Korean market|19| Formosa bond, a non-New Tawan Doar-denomnated bond ssued by a non- Tawan entty n the Tawan market|20| Panda bond, a Chnese renmnb-denomnated bond ssued by a non-Chna entty n the Peope's Repubc of Chna market|21| Dm sum bond, a Chnese renmnb-denomnated bond ssued by a Chnese entty n Hong Kong. Enabes foregn nvestors forbdden from nvestng n Chnese corporate debt n manand Chna to nvest n and be exposed to Chnese currency n Hong Kong.|22| Huaso bond, a Chean peso-denomnated bond ssued by a non-Chean entty n the Chean market.|23| Tha Baht bond, ssued by The Mnstraty of Fnance of The Lao Peope's Democratc Repubc (Lao PDR) nto the Thaand market.|24| Bond vauaton|edt| See aso: Bond vauaton At the tme of ssue of the bond, the nterest rate and other condtons of the bond w have been nuenced by a varety of factors, such as current market nterest rates, the ength of the term and the credtworthness of the ssuer. These factors are key to change over tme, so the market prce of a bond w vary after t s ssued. The market prce s expressed as a percentage of nomna vaue. Bonds are not necessary ssued at par (100% of face vaue, correspondng to a prce of 100), but bond prces w move towards par as they approach maturty (f the market expects the maturty payment to be made n fu and on tme) as ths s the prce the ssuer w pay to redeem the bond. Ths s referred to as "Pu to Par". At other tmes, prces can be above par (bond s prced at greater than 100), whch s caed tradng at a premum, or beow par (bond s prced at ess than 100), whch s caed tradng at a dscount. Most government bonds are denomnated n unts of $1000 n the Unted States, or n unts of 100 n the Unted Kngdom. Hence, a deep dscount US bond, seng at a prce of 75.26, ndcates a seng prce of $752.60 per bond sod. (Often, n the US, bond prces are quoted n ponts and thrty-seconds of a pont, rather than n decma form.) Some short-term bonds, such as the U.S. Treasury b, are aways ssued at a dscount, and pay par amount at maturty rather than payng coupons. Ths s caed a dscount bond. The market prce of a bond s the present vaue of a expected future nterest and prncpa payments of the bond dscounted at the bond's yed to maturty, or rate of return. That reatonshp s the denton of the redempton yed on the bond, whch s key to be cose to the current market nterest rate for other bonds wth smar characterstcs. (Otherwse there woud be arbtrage opportuntes.) The yed and prce of a bond are nversey reated so that when market nterest rates rse, bond prces fa and vce versa. The market prce of a bond may be quoted ncudng the accrued nterest snce the ast coupon date. (Some bond markets ncude accrued nterest n the tradng prce and others add t on separatey when settement s made.) The prce ncudng accrued nterest s known as the "fu" or "drty prce". (See aso Accrua bond.) The prce excudng accrued nterest s known as the "at" or "cean prce". The nterest rate dvded by the current prce of the bond s caed the current yed (ths s the nomna yed mutped by the par vaue and dvded by the prce). There are other yed measures that exst such as the yed to rst ca, yed to worst, yed to rst par ca, yed to put, cash ow yed and yed to maturty. The reatonshp between yed and term to maturty (or aternatvey between yed and the weghted mean term aowng for both nterest and capta repayment) for otherwse dentca bonds s caed a yed curve. The yed curve s a graph pottng ths reatonshp. Bond markets, unke stock or share markets, sometmes do not have a centrazed exchange or tradng system. Rather, n most deveoped bond markets such as the U.S., |apan and western Europe, bonds trade n decentrazed, deaer-based over-the-counter markets. In such a market, market qudty s provded by deaers and other market partcpants commttng rsk capta to tradng actvty. In the bond market, when an nvestor buys or ses a bond, the counterparty to the trade s amost aways a bank or securtes rm actng as a deaer. In some cases, when a deaer buys a bond from an nvestor, the deaer carres the bond "n nventory", .e. hods t for hs own account. The deaer s then sub|ect to rsks of prce uctuaton. In other cases, the deaer mmedatey reses the bond to another nvestor. Bond markets can aso dher from stock markets n that, n some markets, nvestors sometmes do not pay brokerage commssons to deaers wth whom they buy or se bonds. Rather, the deaers earn revenue by means of the spread, or dherence, between the prce at whch the deaer buys a bond from one nvestor-the "bd" prce-and the prce at whch he or she ses the same bond to another nvestor-the "ask" or "oher" prce. The bd/oher spread represents the tota transacton cost assocated wth transferrng a bond from one nvestor to another. Investng n bonds|edt| Bonds are bought and traded mosty by nsttutons ke centra banks, soveregn weath funds, penson funds, nsurance companes, hedge funds, and banks. Insurance companes and penson funds have abtes whch essentay ncude xed amounts payabe on predetermned dates. They buy the bonds to match ther abtes, and may be compeed by aw to do ths. Most ndvduas who want to own bonds do so through bond funds. St, n the U.S., neary 10% of a bonds outstandng are hed drecty by househods. The voatty of bonds (especay short and medum dated bonds) s ower than that of equtes (stocks). Thus bonds are generay vewed as safer nvestments than stocks, but ths percepton s ony partay correct. Bonds do suher from ess day-to-day voatty than stocks, and bonds' nterest payments are sometmes hgher than the genera eve of dvdend payments. Bonds are often qud - t s often fary easy for an nsttuton to se a arge quantty of bonds wthout ahectng the prce much, whch may be more dmcut for equtes - and the comparatve certanty of a xed nterest payment twce a year and a xed ump sum at maturty s attractve. Bondhoders aso en|oy a measure of ega protecton: under the aw of most countres, f a company goes bankrupt, ts bondhoders w often receve some money back (the recovery amount), whereas the company's equty stock often ends up vaueess. However, bonds can aso be rsky but ess rsky than stocks: Fxed rate bonds are sub|ect to nterest rate rsk, meanng that ther market prces w decrease n vaue when the generay prevang nterest rates rse. Snce the payments are xed, a decrease n the market prce of the bond means an ncrease n ts yed. When the market nterest rate rses, the market prce of bonds w fa, reectng nvestors' abty to get a hgher nterest rate on ther money esewhere - perhaps by purchasng a newy ssued bond that aready features the newy hgher nterest rate. Ths does not ahect the nterest payments to the bondhoder, so ong-term nvestors who want a specc amount at the maturty date do not need to worry about prce swngs n ther bonds and do not suher from nterest rate rsk. Bonds are aso sub|ect to varous other rsks such as ca and prepayment rsk, credt rsk, renvestment rsk, qudty rsk, event rsk, exchange rate rsk, voatty rsk, naton rsk, soveregn rsk and yed curve rsk. Agan, some of these w ony ahect certan casses of nvestors. Prce changes n a bond w mmedatey ahect mutua funds that hod these bonds. If the vaue of the bonds n ther tradng portfoo fas, the vaue of the portfoo aso fas. Ths can be damagng for professona nvestors such as banks, nsurance companes, penson funds and asset managers (rrespectve of whether the vaue s mmedatey "marked to market" or not). If there s any chance a hoder of ndvdua bonds may need to se hs bonds and "cash out", nterest rate rsk coud become a rea probem (conversey, bonds' market prces woud ncrease f the prevang nterest rate were to drop, as t dd from 2001 through 2003. One way to quantfy the nterest rate rsk on a bond s n terms of ts duraton. Ehorts to contro ths rsk are caed mmunzaton or hedgng. Bond prces can become voate dependng on the credt ratng of the ssuer - for nstance f the credt ratng agences ke Standard & Poor's and Moody's upgrade or downgrade the credt ratng of the ssuer. An unantcpated downgrade w cause the market prce of the bond to fa. As wth nterest rate rsk, ths rsk does not ahect the bond's nterest payments (provded the ssuer does not actuay defaut), but puts at rsk the market prce, whch ahects mutua funds hodng these bonds, and hoders of ndvdua bonds who may have to se them. A company's bondhoders may ose much or a ther money f the company goes bankrupt. Under the aws of many countres (ncudng the Unted States and Canada), bondhoders are n ne to receve the proceeds of the sae of the assets of a qudated company ahead of some other credtors. Bank enders, depost hoders (n the case of a depost takng nsttuton such as a bank) and trade credtors may take precedence. There s no guarantee of how much money w reman to repay bondhoders. As an exampe, after an accountng scanda and a Chapter 11 bankruptcy at the gant teecommuncatons company Wordcom, n 2004 ts bondhoders ended up beng pad 35.7 cents on the doar|ctaton needed|. In a bankruptcy nvovng reorganzaton or recaptazaton, as opposed to qudaton, bondhoders may end up havng the vaue of ther bonds reduced, often through an exchange for a smaer number of newy ssued bonds. Some bonds are caabe, meanng that even though the company has agreed to make payments pus nterest towards the debt for a certan perod of tme, the company can choose to pay oh the bond eary. Ths creates renvestment rsk, meanng the nvestor s forced to nd a new pace for hs money, and the nvestor mght not be abe to nd as good a dea, especay because ths usuay happens when nterest rates are fang. Bond ndces|edt| See aso: Bond market ndex A number of bond ndces exst for the purposes of managng portfoos and measurng performance, smar to the S&P 500 or Russe Indexes for stocks. The most common Amercan benchmarks are the Barcays Capta Aggregate (ex Lehman Aggregate), Ctgroup BIG and Merr Lynch Domestc Master. Most ndces are parts of fames of broader ndces that can be used to measure goba bond portfoos, or may be further subdvded by maturty and/or sector for managng specazed portfoos.