Bonds

From Financial Literacy Wiki

In finance, a bond is a debt security, in which the authorised issuer owes the holders a debt and is obliged to repay the principal and interest at a later date, termed maturity. Other conditions may also be attached to the bond issue, such as the obligation for the issuer to provide certain information to the bond holder, or limitations on the behavior of the issuer. Bonds are generally issued for a fixed term.

A bond is simply a loan, but in the form of a security, although terminology used is rather different. The issuer is equivalent to the borrower, the bond holder to the lender, and the coupon to the interest. Bonds enable the issuer to finance long-term investments with external funds.

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Difference between Bonds and Stocks

Bonds and stocks are both securities, but the difference is that stock holders own a part of the issuing company (have a stake of the profit), whereas bond holders are in essence lenders to the issuer. Also bonds usually have a defined term, or maturity, after which the bond is redeemed whereas stocks may be outstanding indefinitely. In the event that the issuer goes bankrupt, bond holders have the first claim to what can be retrieved during the sell-off process and the stock holders will have whatever that is remaining.

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