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.
This content can be found on the following page:
http://www.investorwords.com/cgi-bin/getword.cgi?id=521&term=bond
email to a friend
print this definition
cite this definition
link to this page
Copy and paste this HTML in your website to link to this page
Related Research Articles from the InvestorGuide.com University
Advanced Bond Concepts
Learn about callable and non-callable bonds, zero-coupon bonds, secured and unsecured bonds, tax-deferred bonds, put provisions, and other advanced bond concepts.
Introduction to Bonds
This asset class plays an important role in most investors' portfolios, and the basic concepts are important for every investor to know. Here we explain how bonds work, and we describe the different types of bonds, including corporate, municipal, treasury, agency, zero-coupon, and junk bonds.
Other Types of Bonds
Find out about bonds issued by mortgage associations, savings bonds, Brady bonds, as well as those issued by other government agencies, and what the advantages and disadvantages of each type are.
|
|
|
