CandleFocus Glossary Editor
Bondholders are one of the most important constituents in the investing universe since their investments provide funding to governments and companies. Bonds are usually issued with a fixed face value (values can range from $1,000 to millions of dollars) and offer the buyers a set return at maturity and periodic interest payments. When investors purchase a bond, they become creditor’s of the issuing institution and are entitled to an agreed-upon rate of return in exchange for the money they have loaned out for a certain period of time. Bondholders benefit from a number of investor protections, such as the issuer’s agreement to repay the principal amount of the bond at maturity and the distinction of ‘seniority’ among the issuer’s creditors.
Foremost, bondholders generally have a higher claim over the issuer’s assets than stockholders, meaning if the issuing institution defaults on its debt, bondholders usually get paid back before stockholders. Bondholders may also gain if the particular bonds that they own appreciate in value, making them a valuable asset to own. Additionally, bondholders’ returns are not solely dependent on the success of the company as with stockholders because of the periodic payments, generally referred to as ‘coupon payments’, they receive while they hold the bond. Even if the issuer defaults, bondholders may still benefit from any remaining assets of the issuer redeeming their bonds at a greater value than the initial face value.
Investors should understand that bondholders face certain risks, such as the risk of default in the event that the issuer is unable to make its payments. Furthermore, as bond yields increase, the market price of existing bonds decrease, which creates a downside risk for bondholders if they need to sell in the market. Additionally, bondholders are subject to prepayment risk, meaning that if market interest rates decline, the issuer may choose to repay part of the loan before the maturity date, which reduces the bondholder’s return on the investment.
In conclusion, for investors in search of fixed and traditionally low-risk returns, investing in bonds can provide a stable income stream with many different varieties of bonds to choose from. While bondholders bear associated risks, the priority of claim to the issuer’s assets and secure repayment at maturity make bonds a relatively safe investment option compared to stocks.
Foremost, bondholders generally have a higher claim over the issuer’s assets than stockholders, meaning if the issuing institution defaults on its debt, bondholders usually get paid back before stockholders. Bondholders may also gain if the particular bonds that they own appreciate in value, making them a valuable asset to own. Additionally, bondholders’ returns are not solely dependent on the success of the company as with stockholders because of the periodic payments, generally referred to as ‘coupon payments’, they receive while they hold the bond. Even if the issuer defaults, bondholders may still benefit from any remaining assets of the issuer redeeming their bonds at a greater value than the initial face value.
Investors should understand that bondholders face certain risks, such as the risk of default in the event that the issuer is unable to make its payments. Furthermore, as bond yields increase, the market price of existing bonds decrease, which creates a downside risk for bondholders if they need to sell in the market. Additionally, bondholders are subject to prepayment risk, meaning that if market interest rates decline, the issuer may choose to repay part of the loan before the maturity date, which reduces the bondholder’s return on the investment.
In conclusion, for investors in search of fixed and traditionally low-risk returns, investing in bonds can provide a stable income stream with many different varieties of bonds to choose from. While bondholders bear associated risks, the priority of claim to the issuer’s assets and secure repayment at maturity make bonds a relatively safe investment option compared to stocks.