What Is a Prospectus for Bonds?
The U.S. Securities and Exchange Commission is the regulating body for public companies. The SEC monitors the issuance of securities, including stocks and bonds, for the public. One full-disclosure legal document required by the SEC when a company issues bonds is the bond prospectus.
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SEC
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Before the Great Depression, investors were not safeguarded against investment fraud. A company could sell an investor a bond without providing any information about the company's earnings, credit ratings, current debt load, duration of the bond, rate of interest on the bond or any other information that is usually available on the bond term sheet. As a result, the SEC began requiring issuers of bonds and bond funds to provide all investors and future investors with a prospectus.
Objectives & Policies
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The first section in a bond fund prospectus usually provides an overview of the bond's objectives and policies. Some bonds are issued for a specific purpose, such as revenue bonds or infrastructure bonds. Some bondholders prefer to invest in projects rather than a general investment fund. The prospectus will provide a full summary of investment objectives as well as any polices that go along with participating in the offering.
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Issuer Background
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The prospectus also provides information on the background of the issuer or the makeup of the bond fund. Some bonds are issued by the government or a municipality, while others are issued by corporations. The prospectus provides investors and potential investors with a quick summary of the organization that's issuing the bonds, as well as the general performance of the issuing organization.
Special Features
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The prospectus also details any special features of the bond, such as convertibility, call-ability and its interest rate or coupon payment. Some bonds have a set rate of interest, whereas other bonds, referred to as zero-coupon bonds, pay no interest at all. Every broker must provide the bondholder with the prospectus at the time of purchase.
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