What Does Bond Mean?
A bond is a form of debt investment in which individual or institutional investors loan money to an organization or the government for a fixed or variable rate of interest. The duration of the investment is for a pre-agreed upon period of time.
When investors buy a bond, they enter into an agreement with the corporation that is issuing it, also called the issuer. In this agreement, the issuer promises to repay the agreed rate of interest as well as the principal within the stipulated time frame. Investors who have bought these bonds are bondholders or creditors of the organization.
Divestopedia Explains Bond
Bonds are issued by government or private entities when they want to raise money to finance new projects, manage existing ones or to refinance existing debts. They take this option instead of borrowing money from banks because the latter may require some form of collateral as security. In return, the issuer pays a certain amount of interest to the investor with a payout, usually semi-annually. The rate of interest for the bond depends on two main factors: the duration of the bond and the credit quality. In general, if the issuer's credit is poor, then the interest rate tends to be high because the chances for default is high. Bonds with longer maturity dates also carry higher interest because they have lower liquidity and the chances for default are high.
There are many types of bonds available, depending on the issuer. Some well-known types of bonds include U.S. government securities, corporate bonds, municipal bonds, asset-backed securities and mortgage-backed securities. Each of these bonds come with their own advantages and disadvantages, so it is up to the investor to analyze them before investing.
From an investors' perspective, bonds offer the balance needed in an investment portfolio. Most financial experts recommend that investors have a balance between cash, stocks, bonds and assets in order to mitigate potential financial losses. This is why bonds have been traditionally used to plan towards specific financial objectives such as college education or retirement.