What is a bond?
Bonds are financial instruments issued by governments or companies to raise funds. They are also known as debt securities.
Bonds are used for many different purposes, including financing large projects and raising funds. Bond prices fluctuate based on interest rates, which change over time.
- a certificate issued by a government or a public company promising to repay borrowed money at a fixed rate of interest at a specified time.
- an insurance policy held by a company, which protects against losses resulting from circumstances such as bankruptcy or misconduct by employees.
Merriam Webster Online
an interest-bearing certificate of public or private indebtedness
In finance, a bond is a type of security under which the issuer (debtor) owes the holder (creditor) a debt, and is obliged – depending on the terms – to repay the principal (i.e. amount borrowed) of the bond at the maturity date as well as interest (called the coupon) over a specified amount of time. Interest is usually payable at fixed intervals (semiannual, annual, and less frequently at other periods).
Thus a bond is a form of loan or IOU. Bonds provide the borrower with external funds to finance long-term investments or – in the case of government bonds – to finance current expenditure.
Types of bonds
There are two main types of bonds: government bonds and corporate bonds. Government bonds are issued by countries such as Australia, Canada, France, Germany, Japan, New Zealand, South Africa, the United Kingdom, and the United States. Corporate bonds are issued by corporations such as Apple, Ford, General Motors, and Microsoft.
Bonds can also be categorized according to the coupon: fixed-rate and floating-rate coupons. Fixed-rate bonds offer a fixed return for a set period of time. Floating-rate bonds offer a variable return based on market rates.