What Is a Bondholder?

A bondholder is an entity that invests in or owns bonds. Bondholders hold debt securities that are typically issued by corporations and governments. They essentially lend money to bond issuers by giving them capital. In return, bond investors receive their 澳洲幸运5官方开奖结果体彩网:principal or initial investment back when the bonds mature. For most bonds, bondholders also receives periodic interest payments.

Understanding Bondholders

As noted above, an entity that invests in bonds is known as a bondholder. These 澳洲幸运5官方开奖结果体彩网:investors purchase bonds directly from the entity that issues these fixed-income assets. Bonds are usually issued by different levels of government, including federal and local, as well as corporations. For instance, prospective bondholders can purchase Treasury bonds directly from the U.S. Treasury during new issue auctions.

Bonds are sold whenever the issuing entity wants to raise money for an express purpose. For example, governments may issue bonds to fund social programs or 澳洲幸运5官方开奖结果体彩网:infrastructure pro🦂jects. Or corporations may decide to sell bonds to further their own growth.

Bondholders buy bonds from the issuer with upfront capital. In exchange for their money, bondholders are promised the return of their principal investment when the bond matures. Some bond issuers also promise to pay periodic interest or coupon payments that are paid eitꦿher before or upon maturity.

Bonds are typically considered safer investments than stocks because bondholders have a higher claim on the issuing company's assets in the event of bankruptcy. In other words, if the company must sell or 澳洲幸运5官方开奖结果体彩网:liquidate its assets, any proceeds will go to bondholders before common stockholders.

Bondholder Specifics

When investing in bonds, there are several vital areas that the bondholder must understand before investing. Unlike stocks, bonds do not offer ownership participation in a company through a return of profits or voting rights. Instead, they represent the issuer's loan obligations and the likelihood of repayment, and other factors influence their pricing.

Interest Rate

The 澳洲幸运5官方开奖结果体彩网:coupon rate is the rate of interest that the company or government will pay the bondholder. The interest rate can be either fixed or floating. A floating rate might be tied to a benchmark such as the yield of the 10-year Treasury bond.

Some bonds don't pay interest to investors. Instead, they sell at a lower price than their face value or at a discount. A 澳洲幸运5官方开奖结果体彩网:zero-coupon bond, for example, doesn't pay coupon interest but trades at a deep discount to the face value, rendering its profit at maturity when the bond returns its full-face value. For example, a $1,000 discounted bond might sell in the market for $950, and u𓄧pon maturity, the investor receives the $1,000 face value for a $50 profit.

Maturity Date

The date of maturity is when the company must pay back the principal—initial investment—to bondholders. Most government securities pay back the principal at maturity. However, the corporations that issue bonds have a few options for how they c🙈an repay.

The most common form of repayment is called a redemption out of capital. Here, the issuing company makes a lump sum payment on the date of maturity. A second option is called a 澳洲幸运5官方开奖结果体彩网:debenture redemption reserve. With this method, the issuing company returns specific amounts each year until the debenture is repaid on the date of maturity.

Some bonds are 澳洲幸运5官方开奖结果体彩网:callable securities. A callable bond—also known as a redeemable bond—is one that the issuer may redeem at a date before the stated maturity. If called the issuer will return the investor's principal early, ending all future coupon payments.

Credit Ratings

The issuer's 澳洲幸运5官方开奖结果体彩网:credit rating and ultimately the bond's credit rating impac🍎ts the interest rate that investors will receive. Credit-rating agencies measure the creditworthiness of c✨orporate and government bonds to provide investors with an overview of the risks involved in investing in that particular bond as opposed to investing in similar products.

Credit rating agencies typically assign letter grades to indicate these ratings. Standard & Poor’s, for instance, has a credit rating scale ranging from excellent at AAA to C and D for securities that carry higher credit risk. A debt instrument with a rating below BB is considered to be a speculative-grade or a 澳洲幸运5官方开奖结果体彩网:junk bond, which means the bond's issuer is more likely to default on loans.

Bondholders Earn Income

Earned Income

Bondholders earn income in two primary ways. First, most bonds return regular interest—coupon rate—payments that are usually paid semi-annually. However, depending on the structure of the bond it may pay yearly, qꦍuarterly, or even monthly coupons. For example, if a bond pays a 4% interest rate, called a coupon rate, and has a $1,000 face value, the investor will be paid $40 per year or $20 semiannually until maturity. The bondholder receives their full principal ba🦹ck at bond maturity ($1,000 x 0.04 = $40 ÷ 2 = $20).

The second way a bondholder can earn income from the holding is by selling the bond on the 澳洲幸运5官方开奖结果体彩网:secondary market. If a bondholder sells the bond before maturity, there's the potential for a gai✱n on the sale. Like other securities, bonds can increase in val♚ue, but several factors come into play with bond appreciation.

For example, let's say an investor paid $1,000 for a bond with a $1,000 face value. If the bondholder sells the bond before maturity in the secondary market and the bond may fetch $1,050, thereby earning $50 on the sale. Of course, the bondholder could lose if the bond decreases in value from the original purchase price.

Taxation

Besides the upsides of regular passive income and the return of investment at maturity, one big advantage of being a bondholder is the income from certain bonds may be exempt from income taxes. Municipal bonds, those issued by local or state governments, often pay interest that is not subject to taxation. However, to purchase a 澳洲幸运5官方开奖结果体彩网:triple-tax-free bond that is exempt from state, local, and federal taxes, you typically must live in the municipality in which the bond is issued.

Rewards and Risks for Bondholders

Rewards

The rewards available to bondholders include a relatively safe investment product. They receive regular interest payments and a return of their invested principal on maturity. Also, in some cases, the interest is not subject to taxes🐟.

Being a bondholder is generally perceived as a low-risk endeavor when compared to other types of investments, such as stocks. That's because bonds, which are 澳洲幸运5官方开奖结果体彩网:fixed-income investm💞ents, guarantꦜee consistent interest payments and the return of principal at maturity.

In the case of corporate 澳洲幸运5官方开奖结果体彩网:bankruptcies, bondholders are commonly among the first to❀ be reimbursed. Common stockholders, on the other hand, are on the lower rungs🐓 of the repayment ladder.

Although there are 澳洲幸运5官方开奖结果体彩网:certain tax implications associated with certain bonds, there are some bond categories that provide holders with tax-free interest payments. This means the investor doesn't have to declare the interest as income and can net the entire amount as profit.

Risks

The interest rate paid on a bond might not keep up with inflation. 澳洲幸运5官方开奖结果体彩网:Inflationary risk is a measure of price inc🎃reases throughout an economy. If prices rise by 3% and the bond pays a 2% coupon, the bondholder has a net loss in real terms. In other words, bondholders are susceptible to inflation risk.

Bondholders also must deal with 澳洲幸运5官方开奖结果体彩网:interest rate risk. Interest rate risk occurs when interest rates are rising. Most bonds have fixed-rate coupons, and as market rates rise, they may end up paying lower rates. As a result, a bondholder might earn a lower yield compared to the market in the rising-rate environment.

For example, corporate bonds generally yield higher returns than holding 澳洲幸运5官方开奖结果体彩网:government bonds, but they come with higher risks. This yield difference is because it is less ꦡlikely a government or municipality will file for bankruptcy and leave its bondholders unpaid. Of course, bonds issued by foreign countries with sha𒁃kier economies or governments during upheaval can still carry a far greater risk of default than those issued by financially stable governments and corporations.

Bond investors must consider the risk-versus-reward of being a bondholder. Risk causes bond prices on the secondary market to fluctuate and deviate from the bond's face value. Potential bondholders may not be willing to pay $1,000 for a bond with a $1,000 face value if it's issued by a new company with little earnings history, or by a foreign government with an uncertain future.

As a result, the $1,000 bond may only sell for $800 or at a discount. However, the investor who purchases the bond is taking the risk that the issuer will not fold or default before the investment's maturity. In return, the bondholder has the potential of a 20% gain at maturity.

Examples of Bondholders

Potential bondholders can invest in governmentꦕ bonds or corporate bonds. Below is an example of each with the benefits and risks.

Government Bonds

A U.S. 澳洲幸运5官方开奖结果体彩网:Treasury bond (T-bond) is issued by the U.S. government to raise money to finance projects or day-to-day operations. The U.S. Treasury Department issues bonds via auctions at various times throughout the year while existing bonds trade in the secondary🔯 market.

Considered risk-free with the full faith and credit of the U.S. government backing them, T-bonds are a favorite investment for conservative investors. However, the risk-free feature has a drawback as T-bonds usually pay a lower interest rate than corporate bonds.

Treasury bonds are long-term bonds—maturities between 10 to 30 years—providing semiannual interest payments and 澳洲幸运5官方开奖结果体彩网:face values of $1,000. For instance, the 30-year Treasury bond yield closed at 2.817% on March 31, 2019, so the bondholder receives 2.817% yearly. At maturity, in 30 years, they receive the fully invested principal back. T-bonds can sell on the secondary market before maturity.

Corporate Bonds

Microsoft (MSFT) has a series of corporate bonds or notes that it issues to raise capital. Many of them are long-term fixed-income assets that mature within 30 years. Issued on Dec. 6, 2013, its maturity date is Dec. 15, 2013, and trades on the secondary market. On Aug. 17, 2023, the bond's yield was 5.0142%, which means the bondholder gets 5.0142% on an annual basis.

The Bottom Line

Bonds are fixed-income investments that are generally considered safe. Investors who hold bonds are called bondholders. Make sure you know the ins and outs of being a bondholder—notably, things like the interest rate, maturity date, and credit ratings of bond issuers. If you're reviewing an investment in government or corporate bonds, there are certain factors you should consider. Although they are usually safer than stocks, bonds do come with certain risks, including inflation and interest rate risk.