Bondholder

A bondholder is an investor who owns bonds—debt securities issued by governments, municipalities, or corporations. By buying a bond, the bondholder lends money to the issuer in exchange for the return of principal at maturity and, in most cases, periodic interest (coupon) payments. Bondholders are creditors of the issuer and generally have priority over equity holders if the issuer defaults.

Key takeaways

• Bondholders lend capital to issuers and receive principal back at maturity plus interest in most cases.
• They have creditor status and higher repayment priority than stockholders in bankruptcy.
• Bond income can come from coupon payments and from selling the bond on the secondary market.
• Bonds carry credit, interest rate, and inflation risks; some municipal bonds may offer tax-exempt interest.

How bondholding works

Issuers sell bonds to raise funds for projects, operations, or growth. Investors can buy bonds directly at issuance (primary market) or on the secondary market from other investors. The main components that determine a bond’s cash flows and risk are the coupon (interest), maturity date, and the issuer’s creditworthiness.

Key bond features

Coupon (interest rate)

• The coupon is the interest rate paid to bondholders, commonly fixed but sometimes floating (tied to a benchmark).
• Example: A 4% coupon on a $1,000 bond pays $40 per year (often paid semiannually as $20).
• Zero-coupon bonds pay no periodic interest; they sell at a discount and deliver face value at maturity (e.g., buy for $950, receive $1,000 at maturity).

Maturity and repayment

• Maturity is the date the issuer must return the principal.
• Repayment methods include a lump-sum redemption at maturity or scheduled repayments over time.
• Callable bonds allow the issuer to redeem the bond before maturity, which terminates future coupon payments and returns principal early.

Credit ratings

• Rating agencies assess issuer creditworthiness using letter grades (e.g., AAA down to D).
• Higher-rated bonds generally pay lower yields; lower-rated (below BB) are considered speculative or “junk” bonds and carry higher default risk.

How bondholders earn income

1. Regular coupon payments (income).
2. Capital gains or losses from selling the bond before maturity in the secondary market—prices change with interest rates and perceived credit risk.

Tax treatment varies: interest from many municipal bonds is often exempt from federal income tax (and sometimes state/local tax if you reside in the issuing jurisdiction).

Rewards and risks

Rewards

• Predictable income stream from coupons.
• Return of principal at maturity (subject to issuer solvency).
• Priority over equity holders in bankruptcy.
• Potential tax advantages for certain municipal bonds.

Risks

• Credit/default risk if the issuer cannot repay principal or interest.
• Interest rate risk: when market rates rise, existing bonds with lower coupons typically fall in price.
• Inflation risk: fixed coupons can lose purchasing power if inflation exceeds the coupon rate.
• Liquidity risk: some bonds may be hard to sell without a price concession.

Examples

Government bonds

Treasury bonds issued by national governments are generally considered low-risk because they are backed by the issuing government. They typically pay periodic interest and return principal at maturity. Yields are usually lower than comparable corporate bonds due to lower credit risk.

Corporate bonds

Corporations issue bonds to raise capital. Corporate bonds often offer higher yields than government bonds to compensate for greater credit risk. Credit quality varies widely depending on the company’s financial strength.

Rights of bondholders

• Right to be repaid the principal at maturity (subject to issuer solvency).
• Right to receive interest payments at the agreed intervals (annual, semiannual, quarterly, etc.).

Government vs. corporate bonds

• Government bonds are issued by sovereign or local governments and are generally seen as safer.
• Corporate bonds are issued by companies and typically carry more credit risk but higher yields. Bondholders still rank ahead of equity holders in claims on assets.

Can you lose money on a bond?

Yes. Bondholders can lose money through default, selling at a loss on the secondary market, inflation eroding real returns, or after-tax returns being lower than expected due to taxation.

Conclusion

Bondholders are creditors who receive interest and eventual return of principal but face risks related to issuer creditworthiness, interest rates, and inflation. Understanding coupon structure, maturity, and credit ratings is essential before investing in bonds.