What are bonds & how do they work?

What Are Bonds? Bonds are investment securities where an investor lends money to a company or a government for a set period of time, in exchange for regular interest payments. Once the bond reaches maturity, the bond issuer returns the investor’s money.

How does a bond issuance work?

A company that issues bonds is borrowing money, which must be repaid over time — with interest. At the time of the bond issuance, the company receives the cash and reports an inbound cash flow. However, it must then start to pay back the bond, triggering an outbound cash flow.

What is a government bond?

In short it is an IOU that can be traded in the financial markets. If a government wants to borrow money (and most do) they usually do it by selling bonds to investors. The investor then gets to receive a stream of future payments. The most common form of bond involves two types of payment by the borrower to the holder of the bond:

What is a municipal bond?

Municipal bonds, also called munis, are issued by states, cities, counties and other nonfederal government entities. Similar to how corporate bonds fund company projects or ventures, municipal bonds fund state or city projects, like building schools or highways. Municipal bonds can have tax benefits.