47+ Sample Bond Agreement Templates

What Is a Bond Agreement?

There are different types of bond contracts. It can be a performance bond agreement, a bond purchase agreement, a corporate bond agreement, and more. The question is, what is a bond? A bond refers to an income instrument representing a loan that an investor offers to its borrowers, which can be a corporation or a government institution. Governments, states, municipalities, and companies use bonds to fund projects as well as operations. You can liken a bond agreement to an IOU. An IOU is an official paper that proves an entity’s financial obligation toward another entity. Moreover, a contract bond will include details about the principal loan due and the terms regarding payment. For corporations, they use these funds to expand their business, to purchase equipment and property, to start projects, to fund research, or to recruit employees.

According to a study conducted by FINRA in 2019, knowledge about investments in the U.S. is low because only one-third of the participants were able to answer the quiz correctly.

Also, several investors are confused about investing fees, where about 14% of the total respondents don’t think they pay for expenses and 17% claim that they have no idea how much to pay.

Additionally, 72% of the participants do the deciding for themselves when investing.

To have a better understanding of bonds, one must know the terms related to it. So here are some terms related to bonds.

Bond indenture. An indenture is a contract between two entities. This term is common in bond contracts and real estate agreements. It is a document that spells out the responsibilities of a bond issuer. Also, it contains information regarding what a borrower owes to a bondholder. Note that an indenture is different from a debenture. A debenture refers to an unsecured bond.Core assets. Core assets are assets that are valuable enough to impact or stop a company’s function and profit. They are assets that help a company produce revenue. Bonds can finance these types of assets since it offers long-term capital. These assets may come in the form of storage outlets, production facilities, machinery, etc. Also, they can be intellectual property such as patents and trademarks. Therefore, core assets make a business thrive.Credit quality. Credit quality serves as judging criteria for the quality of investments, such as mutual funds or bonds. Also, it informs an investor about a bond’s creditworthiness or default risks. You can determine a bond’s credit quality through rating agencies like Fitch, Moody’s, and Standard & Poor’s. Each agency has unique credit quality scores or designations. Moreover, factors that affect the credit rating of a company includes its earnings, revenue, payment history, and capital structure.Face value. Face value describes the dollar or nominal value of an asset or security an issuer states. For stocks, it refers to the actual cost of a stock. For bonds, it is money the bondholder receives at maturity. Another name for face value is par value. Par value is the money a bondholder gets at maturity. However, bonds on a secondary market may change depending on interest rates. For example, if an interest rate is higher than a coupon rate, you expect to purchase a bond at a discount or below par.Fixed-income security. A bond is a type of fixed-income security. Income security refers to an investment that guarantees a return. The money an investor collects is the combination of interest payments and the principal amount. The advantage of this type of security is that the ROI is fixed. Companies increase their capital by supplying investors with fixed-income products.Fixed-interest. Unlike a variable interest, a fixed interest is a set interest rate when one takes out a loan. It can be for a whole term or just a portion of it, yet the amount is the same throughout the fixed period. This type of interest rate appeals to borrowers that don’t want to risk paying for fluctuating rates. However, fixed interest rates are usually higher compared to adjustable rates.Government bond. The United States Treasury Department issues government bonds that help finance projects and daily operations. They sell these bonds in auctions, while some bonds are available in a secondary market. Local governments can also provide bonds to finance the construction of infrastructure, parks, and libraries. Note that government bonds are also municipal bonds, and they offer a tax advantage to investors.Indemnity bond. An indemnity bond, which is also known as a surety bond, is a document that ensures a bond owner that he/she will receive a reimbursement in case of loss caused by another party. Typically, there are three parties involved: the principal, the obligor, and the guarantor. The principal refers to the person who will receive reimbursement in the event of a breach. The obligor is the person who buys the indemnity bond. The guarantor is a bank that pays for the obligor’s failure to fulfill the contract’s duties. In other words, indemnity guarantees payments.Principal. The term principal can have several meanings, but it is common in loans. It refers to money that a borrower owes or money placed in an investment. When borrowing, the principal is equal to the original loan amount, or it can also mean that one still owes a debt. For example, if you apply for a $60,000 mortgage and pay some amounting to $40,000, your principal balance is $20,000. When investing, the principal refers to the amount you initially spend in a share or asset. For example, the amount you invest is equal to $6,000, and after ten years, your money grows to $7000. The $6000 is the principal amount, while the $1,000 is your earnings.Variable interest. A variable interest is also known as a floating interest rate. It refers to interest on security or loan that fluctuates depending on the benchmark or index it follows. The advantage of this type of interest rate is when the rate declines, the borrower will also have to pay lesser interest. However, the opposite can also happen, which is a significant disadvantage. Rates for automobiles, credit cards, and mortgages may depend on a country’s prime rate.

How To Purchase a Company Bond

Investing your money in bonds can be more complicated than investing it in stocks. Most often, only expert investors purchase bonds because the market of corporate bonds gives only little opportunity for small and novice investors. Nevertheless, one can buy recently issued company bonds from a broker or older bonds in OTC markets. With that said, here are ways to purchase a company or corporate bond.

Step 1: Try Purchasing New Bonds

When a company decides to trade bonds to increase its capital, it arranges deals with bankers or large investors to make those bonds available to the market. The pricing of these issues is uncomplicated and easy to understand. However, taking hold of these bonds can be challenging. You will need some connection with an institution or a banker that handles new bonds. New investors may find this problematic.

Step 2: Take Advantage of a Secondary Market

A secondary market comes to play after an initial offering. This market is where small investors access bonds quickly. However, one should be cautious. Usually, trades happen through the phone on through closed bond-trading systems. An ordinary investor can only participate with the help of a broker. Moreover, the prices in this type of market are difficult to understand.

Step 3: Do Some Research

If you plan to buy corporate bonds in a secondary market, do some research. Understand the pricings and keep an eye on the recent bond sales so you can compute for the spread or the markup. The spread indicates what the difference is between the selling price of a broker and the original price of the bond. A non-governmental agency, which is the FIRA or Financial Industry Regulatory Authority, offers information about recent bond pricings. So, before you purchase a bond from a broker, search for recent quotes, and compare.

Step 4: Keep an Eye on Your Broker

Bear in mind that buying corporate bonds requires more due diligence, which means you have to check your broker out. Get some advice from trade associations that keep track of the market. Also, they can do some research on your broker in detail.

Step 5: Opt For Public Exchange

Presently, one can trade bonds with the help of the New York Stock Exchange. The NYSE launched its system way back in 2007, which replaced the Automated Bond System with one that can also work for ordinary investors. Since their launch, more and more bonds are sold through their system. However, exchanged-traded bonds only make up a small percentage in the market.

FAQs

What is an employee bond?

An employment bond is an insurance that safeguards an employer when employees perform dishonest or fraudulent acts. Typically, employers buy fidelity bonds for workers who can access the company’s assets (e.g., an accountant). This type of insurance reimburses a company in case an employee does a criminal act.

Is a bail bond also a type of investment?

Bail is money that serves as an insurance between a defendant and the court. Defendants can opt to pay bail with cash, yet many cannot since it requires a large sum of money. So, they ask help from a bail bondsman, who can post a bond for them. With that said, a bail bond is a surety bond that a bond company provides by commissioning bail agents. It ensures that a defendant will be released from jail.

How do you compute for the price of a bond?

You can use the YTM or yield-to-maturity formula. It is the total amount of money an investor anticipates if the bond reaches maturity. The rate of YTM is expressed annually. The YTM formula can be complex but it is useful in evaluating bonds. So, here’s the formula: YTM is equal to the nth root of the bonds face value over its present value. Then, you subtract one from the outcome.

A bond agreement is a document that protects an investor’s investment. Without one, the investor’s money is at risk of fraud. It is like giving away money without a cause. If you want to know what it looks like, check our sample templates above.