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Bondholder

Definition

A bondholder is an individual or entity that owns bonds issued by corporations or governments. These bonds are essentially loans that the bondholder has given to the issuer. As a return, the bondholder receives periodic interest payments and the return of the principal amount when the bond matures.

Phonetic

The phonetic spelling of the keyword “Bondholder” is: /bɒndˈhoʊldər/

Key Takeaways

  1. Bondholders are investors: Bondholders are individuals or entities who purchase debt securities, specifically bonds. They are essentially lending money to the issuer of the bond, and are therefore considered as creditors to the company or government agency issuing the bond.
  2. Interest Payment and Principal Return: As a lender to the issuing organization, bondholders receive a fixed interest rate on their investment, usually paid semi-annually, as compensation. Further, the bondholder receives the full amount they initially invested, known as the principal, at the bond’s maturity date.
  3. Risk and Security: Investing in bonds carries risk, however, it is typically considered a safer investment compared to equity due to the promised returns. But bondholders are at risk if the bond issuer defaults. This risk is diluted if the bond is backed by collateral. Also, in case of company liquidation, bondholders are paid off before equity shareholders.

Importance

A bondholder is a significant term in business and finance as it refers to an individual or entity that owns a bond issued by a corporation, government, municipality, or other organization. Bondholders play a vital role in financial markets as they provide needed capital for these organizations, for which they are promised a return on their investment in the form of periodic interest payments and the return of the bond’s face value upon maturity. The rights and interests of bondholders are crucial in financial risk management, investment strategies, and the overall functioning of capital markets. Their financial relationship to the bond issuer also largely determines the issuer’s creditworthiness and borrowing costs.

Explanation

A bondholder is an investor or a party to a contract who purchases a bond, thus lending money to the issuer of the bond, most often a corporation or a governmental body. The bondholder’s primary purpose is to earn a return on their investment, capitalizing on predictable income through interest payments, also known as “coupon payments” , made by the issuer over the life of the bond. Bondholders make a meaningful impact by providing necessary capital that these organizations need to finance their activities, expand operations, or fund new projects. The arrangement is designed to act as a win-win for both the issuer and the bondholder. From the issuer’s perspective, bonds serve as avenues for raising capital at a cheaper rate than equity financing. They can borrow funds at lower interest rates to make productive investments and engage in profitable projects. For the bondholder, besides representing a sound investment with regular income, bonds are generally considered safer investments than stocks, especially if the bonds are issued by a reliable and reputable entity. Therefore, bonds offer a relatively less risky way for bondholders to diversify their investment portfolios.

Examples

1. Government Bonds: Many citizens become bondholders when they invest in government bonds. These bonds are perceived to be lower risk because they are backed by the full faith and credit of the government. Specifically, the U.S. Department of the Treasury issues several types of bonds, such as Savings Bonds, Treasury Bonds, and Treasury Inflation-Protected Securities (TIPS). These bondholders lend money to the government for a specified period, expecting to receive periodic interest payments and the return of the principal amount at maturity.2. Company Bonds: When a corporation like Apple or Amazon wants to raise funds for a new project or expansion, they might issue corporate bonds. Investors who buy these become bondholders. They lend money to the company in return for regular interest payments and the promise of principal repayment at the maturity date.3. Municipal Bonds: Cities and other local governments can also issue bonds to fund projects such as building schools, highways or sewage systems. Those who invest in these bonds are known as bondholders. They lend money to the municipal entity and receive regular interest payments, typically exempt from federal and sometimes state and local taxes. And similarly to other bonds, the principal investment is returned upon reaching the bond’s maturity date.

Frequently Asked Questions(FAQ)

Who is a Bondholder?

A bondholder is an individual or a company who holds a bond issued by a government, corporation, or other entity. The bondholder is therefore a creditor to the bond issuer.

What rights does a bondholder have?

A bondholder has the right to receive the principal and interest on the bond, as specified in the bond indenture. They can also sell their bonds to another investor.

Can a bondholder lose money?

Yes, a bondholder can potentially lose money if the issuer defaults on its payment obligations or if the bondholder has to sell the bond for less than its purchase price.

How is the bondholder paid?

The bondholder is typically paid by interest payments made over the term of the bond. At the end of the maturity period, the bond issuer returns the principal amount to the bondholder.

Can a bondholder sell their bonds before maturity?

Yes, a bondholder can choose to sell their bonds before the maturity date on the open market. The price at which they sell can be more or less than the face value of the bond, based on market conditions.

How is a bondholder different from a shareholder?

A bondholder is a creditor to a company or government, while a shareholder is an owner. Bondholders have a right to interest and principal payments but do not share in the profits or growth of the business as shareholders do.

Do bondholders have voting rights in the company?

No, bondholders do not have voting rights in the company. They do not have any control over the company’s operations or management decisions.

What happens to bondholders if the company goes bankrupt?

If the company goes bankrupt, bondholders are given priority over shareholders during the liquidation process. However, they may not receive the full value of their investment if the company’s assets are insufficient to cover all debts.

Related Finance Terms

  • Corporate Bond: This is a bond issued by a company or corporation. The bondholder lends money to the company in exchange for regular interest payments and the return of the principal amount on maturity.
  • Bond Yield: This represents the return on investment for the bondholder. It’s calculated as the annual interest payment divided by the market price of the bond.
  • Coupon Rate: This is the interest rate stated on a bond when it’s issued. The bondholder receives this rate on the bond’s face value periodically until maturity.
  • Maturity Date: This is the date on which the bond will mature and the principal amount is due to be paid back to the bondholder.
  • Credit Risk: This is the risk of default on a debt that may arise from a borrower failing to make required payments to the bondholder.

Sources for More Information

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