What is a Bond?
A bond is a loan that is given to a borrower with the purpose of using the funds to pay for business operations. Bonds are typically used by companies, cities, towns, states, and independent governments. The money can be used for acquiring property, purchasing equipment, professional development, and many other business purposes.
The investor(creditor), who issued the funds to the business or government entity, earns interest on the funds that were provided. Payments and interest are established once the bond is issued and depending on the terms and conditions that were agreed upon, they can be monthly, quarterly, bi-annually, or annually. Zero coupon bonds do not pay interest at all, the bonds appreciate in value and this is how the creditor is compensated. Bonds also have a “maturity date”, in which the loan must be fully paid back to the investor or else the borrower may go into default.
There are many different types of bonds, but the four main categories include corporate bonds, municipal bonds, government bonds, and agency bonds, and each hold different benefits. As you learn more about the options that are available and what would be best for you, there are a few general things to keep in mind:
- The interest rate is connected to the credit and trustworthiness of the company. Rating agencies are used to determine this, and the higher rating, the lower the risk is of default.
- Bonds can be issued for a small period of time such as one year, or as long as a few decades.
- Generally speaking, bonds are marketable securities