What is a bond & how does it work?

A bond could be thought of as an I.O.U. between the lender and borrower that includes the details of the loan and its payments. Bonds are used by companies, municipalities, states, and sovereign governments to finance projects and operations. Owners of bonds are debtholders, or creditors, of the issuer.

What are the characteristics of bonds?

Some of the characteristics of bonds include their maturity, their coupon (interest) rate, their tax status, and their callability. Several types of risks associated with bonds include interest rate risk, credit/default risk, and prepayment risk. Most bonds come with ratings that describe their investment grade.

What are the different types of bonds?

The main three types of bonds to know are corporate, municipal and Treasury bonds: Corporate bonds: As you might guess, these are bonds issued by corporations. Companies may decide to issue bonds in order to raise capital for things like research and development.

Are bonds a debt?

In short, bonds are debt. It’s not unusual for individuals to taking on debt from banks when they borrow money (in the form of a loan) to pay for a mortgage, car, higher education, etc. But with bonds, think of the role as reversed. Individuals, or investors, lend money to corporations and governments who need the funds.