Straight Bond

What Is a Straight Bond?

A straight bond is a bond that pays interest at normal spans, and at maturity repays the principal that was initially invested. A straight bond has no special elements compared to different bonds with embedded options. U.S. Treasury bonds issued by the government are instances of straight bonds.

A straight bond is likewise called a plain vanilla bond or a bullet bond.

Straight Bonds Explained

A straight bond is the most fundamental of debt investments. It is otherwise called a plain vanilla bond since it has no extra elements that different types of bonds could have. Any remaining bond types are varieties of or increases to standard straight bond highlights. For instance, a few bonds can be changed over into shares of common stock and others can be called or recovered before their maturity dates. Special bonds like convertible, callable, and puttable bonds are structured as straight bonds plus a call option or warrant.

Likewise with all bonds there is default risk, which is the risk that the company could fail and never again honor its debt obligations, as well as interest rate risk as rate changes influence bond prices in the secondary market.

The standard elements of a straight bond incorporate consistent coupon payments, face value or par value, purchase value, and a fixed maturity date. A straight bondholder hopes to receive periodic interest payments, known as coupons, on the bond until the bond develops. At maturity date, the principal investment is repaid to the investor. The return on principal relies upon the price that the bond was purchased for. Assuming that the bond was purchased at par, the bondholder receives the par value at maturity. On the off chance that the bond was purchased at a premium to par, the investor will receive a par amount not as much as their initial capital investment. At long last, a bond acquired at a discount to par means that the investor's repayment at maturity will be higher than their initial investment.

Illustration of Straight Bonds

For instance, we should take a gander at a discount bond with a face value of $1,000 issued by a corporation. The redemption date for the bond is scheduled for a long time from the issue date and the coupon rate, as verified in the trust indenture, is fixed at 5%. The coupon is to be paid annually, in this way, the bondholders will receive 5% x $1,000 face value = $50 consistently for quite a long time. On the maturity date, the last coupon payment is made plus the redemption amount of the bond's face value. Since the bond was issued and purchased for a discount value of $925, a bondholder will receive $1,000 face value on the maturity date. In this case, an investor that needs to measure the yield of this bond can ascertain the current yield, what partitions the annual coupon by the bond price. The current yield in our model is $50/$925 = 5.41%

Features

• This makes pricing straight bonds simple and straightforward, however these bonds are as yet subject to interest rate and default risk that can hurt investors.
• A straight bond is a plain vanilla bond that obliges the issuer to standard, fixed interest as well as principal repayment upon maturity.
• Otherwise called a bullet bond, these issues have no special highlights, embedded options, floating interest rates, or exotic contracts.