What is a Bond

What is a Bond: "A. 'A Bond is simply an 'IOU' in which an investor agrees to loan money to a company or government in exchange for a predetermined interest rate.' If a business wants to expand, one of its options is to borrow money from individual investors. The company issues bonds at various interest rates and sells them to the public. Investors purchase them with the understanding that the company will pay back their original principal plus any interest that is due by a set date [this is called the 'maturity']. A bondholder is mailed a check from the company at set intervals [for example, every month] until the 'loan' is paid off. The interest a bondholder earns depends on the strength of the corporation. For example, a blue chip is more stable and has a lower risk of defaulting on its debt. When companies such as Exxon Mobile, General Electric, etc., issue bonds, they may only pay 7% interest, while a much less stable start-up pays 10%. A general rule of thumb when investing in bonds is 'the higher the interest rate, the riskier the bond.' Who can issue bonds? Governments, municipalities, a variety of institutions, and corporations. 'Commercial Paper' is simply referring to bonds issued by companies.

There are many types of bonds, each having different features and characteristics. A few of the most notable are zero coupon and convertible.

You can find more information in Bonds 101: What They Are and How They Work.

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