When trading or investing in bonds, people should try to know more about its basic characteristics.

First of all, people must know the basic characteristic of a bond. It is simply a type of loan that a company offers. Investors that buy bonds are actually lending a company some money. In exchange, the company agrees to pay interest at certain intervals and pays off the principal at the maturity date when the loan is closed.

A bond usually comes with a legal document that specifically outlines its characteristics. This makes it different from stocks, where most shares usually follow the same characteristics all throughout. And since one bond issue may differ from another, people should first be able to get a grasp of these different characteristics before investing. Here are some of the most important ones.

Maturity Date

The maturity date is the date when the principal amount is to be paid by the company to the bond holder. It is also the date when the company’s debt obligation to the bond holder ends.

Bond Coupon

A coupon is simply the rate of interest that the bond issuer pays to bond holders. It may be paid either in semi-annual or annual basis.

Tax Status

Bonds can either be taxable or tax exempt. A majority of corporate bonds are actually taxable investments. Government and municipal bonds, on the other hand, are usually not subjected to the usual state and federal taxes, including that on income as well as capital gains.

Liquidation Preference

A bond may also acquire a safety feature in being preferred for initial liquidation in case a company goes into bankruptcy. This means that bondholders usually have the first preference of being paid in case an organization where the bond was issued goes bankrupt.

Call Provision

There are some bonds that may come with a call provision. This is an option that the bond issuer may act on to pay off the bonds at an earlier date than its maturity. In this case the bond principal is usually paid at a slightly higher premium. This is usually offered on some corporate bonds.