What is a Bond?

April 3

Bond is a certificate that acknowledges the indebtedness of the bond issuer to the holder also it states the interest rate (coupon) that will be paid and when the loaned funds (bond principal) are to be returned (maturity date).Bonds are used by companies, municipalities, states and U.S. and foreign governments to finance a variety of projects and activities.Really, a bond is nothing more than a loan for which you are the lender. The organization that sells a bond is known as the issuer. Of course, nobody would loan his or her hard-earned money for nothing. The issuer of a bond must pay the investor something extra for the privilege of using his or her money. This "extra" comes in the form of interest payments, which are made at a predetermined rate and schedule. The interest rate is often referred to as the coupon. The date on which the issuer has to repay the amount borrowed (known as face value) is called the maturity date Bonds are commonly referred to as fixed-income securities and are one of the three main asset classes, along with stocks and cash equivalents. The major difference between stocks and bonds is that (capital) stockholders have an equity stake in the company (i.e., they are owners), whereas bondholders have a creditor stake in the company (i.e., they are lenders). Another difference is that bonds usually have a defined term, or maturity, after which the bond is redeemed, whereas stocks may be outstanding indefinitely.

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