bond
Definition
A debt instrument issued for a period of more than one year with the purpose of raising capital by borrowing. The Federal government, states, cities, corporations, and many other types of institutions sell bonds. Generally, a bond is a promise to repay the principal along with interest (coupons) on a specified date (maturity). Some bonds do not pay interest, but all bonds require a repayment of principal. When an investor buys a bond, he/she becomes a creditor of the issuer. However, the buyer does not gain any kind of ownership rights to the issuer, unlike in the case of equities. On the hand, a bond holder has a greater claim on an issuer's income than a shareholder in the case of financial distress (this is true for all creditors). Bonds are often divided into different categories based on tax status, credit quality, issuer type, maturity and secured/unsecured (and there are several other ways to classify bonds as well). U.S. Treasury bonds are generally considered the safest unsecured bonds, since the possibility of the Treasury defaulting on payments is almost zero. The yield from a bond is made up of three components: coupon interest, capital gains and interest on interest (if a bond pays no coupon interest, the only yield will be capital gains). A bond might be sold at above or below par (the amount paid out at maturity), but the market price will approach par value as the bond approaches maturity. A riskier bond has to provide a higher payout to compensate for that additional risk. Some bonds are tax-exempt, and these are typically issued by municipal, county or state governments, whose interest payments are not subject to federal income tax, and sometimes also state or local income tax.
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Related Terms
loan, note, full coupon bond, zero-coupon bond, municipal bond, general obligation bond, income bond, discounted bond, anticipation note, asset class, stock, assumed bond, par, yield, yield curve, face value, baby bond, coupon bond, registered bond, blanket bond, Brady bond, callable bond, Treasury Bond, combination bond, commodity-backed bond, consolidated bond, convertible bond, corporate bond, Government Bond, secured bond, unsecured, dollar bond, domestic bond, dual currency bond, embedded option, Eurobond, gold bond, guaranteed bond, high-grade bond, investment-grade bond, index bond, interchangeable bond, junk bond, ladder strategy, staggered maturities, Long Bond, short bond, maintenance bond, moral obligation bond, mortgage bond, performance bond, credit risk, fixed income, indenture, premium bond, privileged bond, public bond, registered coupon bond, revenue bond, Savings Bond, serial bond, series bond, special-purpose bond, step-up bond, straight bond, tax-exempt bond, bondholder, catastrophe bond, fidelity bond, index-linked bond, Series I Bond, surety bond
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