BOND EXCHANGE

Bonds are essentially instruments used by the private and public sectors to raise capital either for investment or current expenditures (government bonds are primarily issued to fund current projects). A bond is a debt security, and in simplistic terms, could be described as the relationship in which one party issues a legally binding promise to repay, with interest, a lending party the amount that was borrowed. The bond issuer borrows funds from the bondholder, and guarantees that the amount borrowed will be fully repaid; because the bondholder assumes the risk of lending funds, however, interest is charged on the principal amount borrowed. The interest charges take the form of regular coupon payments which are a set and consistent amount of money. The relationship between the price paid for the bond and the bond's assured coupon amount together act to establish the interest that the bondholder earns from the investment.