Loading the player...

What is a 'Straight Bond'

A straight bond is a bond that pays interest at regular intervals, and at maturity pays back the principal that was originally invested. A straight bond has no special features compared to other bonds with embedded options. U.S. Treasury bonds issued by the government are examples of straight bonds.

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

BREAKING DOWN 'Straight Bond'

Straight bonds are debt instruments used by fixed income investors to lend money (creating debt) to an entity. The entity, which can be a government, municipality, or an organization, promises to pay the interest on the debt and, at maturity, pay back the original loan.

The features of a straight bond include constant coupon payments, face value or par value, purchase value, and a fixed maturity date. A straight bondholder expects to receive periodic interest payments, known as coupons, on the bond until the bond matures. At maturity date, the principal investment is repaid to the investor. The return on principal depends on the price that the bond was purchased for. If the bond was purchased at par, the bondholder receives the par value at maturity. If the bond was purchased at a premium to par, the investor will receive a par amount less than his or her initial capital investment. Finally, a bond acquired at a discount to par means that the investor’s repayment at maturity will be higher than his or her initial investment.

For example, let’s look at a discount bond with a face value of $1,000 issued by a corporation. The redemption date for the bond is scheduled for 10 years from the issue date and the coupon rate, as noted in the trust indenture, is fixed at 5%. The coupon is to be paid annually, therefore, the bondholders will receive 5% x $1,000 face value = $50 every year for ten years. 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 wants to measure the yield of this bond can calculate the current yield, which divides the annual coupon by the bond price. The current yield in our example is $50/$925 = 5.41%

A straight bond is the most basic of debt investments. It is also known as a plain vanilla bond because it has no additional features that other types of bonds might have. All other bond types are variations of or additions to standard straight bond features. For example, some bonds can be converted into shares of common stock and others can be called or redeemed before their maturity dates. Special bonds such as convertible, callable, and puttable bonds are structured as straight bonds plus a call option or warrant.

 As with all bonds there is default risk, which is the risk that the company could go bankrupt and no longer honor its debt obligations.

RELATED TERMS
  1. Bond Valuation

    Bond valuation is a technique for determining the theoretical ...
  2. Discount Bond

    A discount bond is a bond that is issued for less than its par ...
  3. Put Bond

    A put bond is a bond that allows the bondholder to force the ...
  4. Pull To Par

    Pull to par is the movement of a bond's price toward its face ...
  5. Bond Yield

    Bond yield is the amount of return an investor will realize on ...
  6. Bond Fund

    A bond fund is a fund invested primarily in bonds and other debt ...
Related Articles
  1. Investing

    Corporate Bond Basics: Learn to Invest

    Understand the basics of corporate bonds to increase your chances of positive returns.
  2. Investing

    Top 6 Uses For Bonds

    We break down the stodgy stereotype to see what these investments can do for you.
  3. Investing

    The Basics Of Bonds

    Bonds play an important part in your portfolio as you age; learning about them makes good financial sense.
  4. Financial Advisor

    Calculate PV of different bond type with Excel

    To determine the value of a bond today — for a fixed principal (par value) to be repaid in the future — we can use an Excel spreadsheet.
  5. Investing

    Key Strategies To Avoid Negative Bond Returns

    It is difficult to make money in bonds in a rising rate environment, but there are ways to avoid losses.
  6. Investing

    Comparing Yield To Maturity And The Coupon Rate

    Investors base investing decisions and strategies on yield to maturity more so than coupon rates.
RELATED FAQS
  1. How a bond's face value differs from its price

    Discover how bonds are traded as investment securities and understand the various terms used in bond trading, including par ... Read Answer >>
  2. Why is my bond worth less than face value?

    Find out how bonds can be issued or traded for less than their listed face values, and learn what causes bond prices to fluctuate ... Read Answer >>
Hot Definitions
  1. Discount Rate

    Discount rate is the interest rate charged to commercial banks and other depository institutions for loans received from ...
  2. Economies of Scale

    Economies of scale refer to reduced costs per unit that arise from increased total output of a product. For example, a larger ...
  3. Quick Ratio

    The quick ratio measures a company’s ability to meet its short-term obligations with its most liquid assets.
  4. Leverage

    Leverage results from using borrowed capital as a source of funding when investing to expand the firm's asset base and generate ...
  5. Financial Risk

    Financial risk is the possibility that shareholders will lose money when investing in a company if its cash flow fails to ...
  6. Enterprise Value (EV)

    Enterprise Value (EV) is a measure of a company's total value, often used as a more comprehensive alternative to equity market ...
Trading Center