A bond prospectus, otherwise known as an offering statement, is a formal legal document which usually gives the needed details about the corporation one intends to invest in, and also details about the bond before one makes an investment decision. It basically contains all the information and strategies that revolve around the issuing of that particular bond and reading through the prospectus carefully before purchasing a bond is advised by the Security Industry and Financial Markets Association. Each feature in a bond prospectus is included for a specific purpose, and they impact on the yield of a new bond issue.
One of the main features which could be included in a bond prospectus and hence impact on the yield of a new bond issue is the predetermined interest rate, also known as a coupon rate. This is usually set when a fixed-income security bond is issued, and it is what determines the yield on one’s investment. Depending on the interest rate provided, the interest payments to the investor may be high or low. This directly influences the returns of the new bond issue. The second feature is the maturity date of the bond; this determines the period one must hold the bond before repaying the principal. This is an important aspect which is included in the prospectus, and it may range from one year to ten years (Kung, 2005). The third essential feature that could be included in the bond prospectus is the early call provisions. Investors always look for this information in a prospectus as it shows whether or not a bond will reach maturity, and any protections offered in case of this risk. If an investor receives an early payment and wishes to reinvest, they often will purchase the bonds at lower rates as compared to those which are available when the bond was originally purchased (Sessoms, n.d).
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In addition to the mentioned features, a bond prospectus could also include details about the plans of the one issuing the bond to raise money meant for repaying investments. Moreover, it includes a directional outlook of the bond which will affect the favorability of the future market. Investors may want to sell the bond in future, hence it is important to project how much he or she will for the bond. Last but not least, a prospectus should include whether or not the bond is insured so that in case the issuer defaults, the insurance company will repay he investors.
References
Sessoms, G. (n.d). What Is a Prospectus for Bonds? The Nest . Retrieved from http://budgeting.thenest.com/prospectus-bonds-21457.html
Kung, F. H. (2005). Regulation of Corporate Bond Offerings: A Comparative Analysis, The. U. Pa. J. Int'l Econ. L. , 26 , 409.
