A
bond is a debt security where the issuer owes the holder of the bond a debt. A
bond is a fixed-income security, meaning the investor is guaranteed repayment.
Bonds can be issued by companies, individuals, or government agencies.
The
receiver of the bond pays the issuer the bond price and, in turn, the
individual receives interest payments and eventually a percentage return that
is more than the original price of the bond. As a result of the guaranteed
repayment, a typical bond only returns roughly 5% of the original investment.
Depending on the terms of the bond, the issuer is
obligated to pay interest and/or the entire principal at a later date. In
essence, bonds are formal contracts that repay borrowed money with interest at
fixed intervals.
A
bond is essentially a loan agreement; the issuer is the borrower of the loan
and the holder is the lender. All bonds have a coupon attached, also known as
an interest rate. Bonds provide the issuer (government agency or corporation)
with a lump sum of capital to finance long-term investments or current
expenditures.
Certificates of deposits or money market accounts
are held separately from bonds because a bond is repaid at fixed intervals over
the period of maturity. Bonds are also held separately from stocks.
Although stocks and bonds are both securities, the
primary difference between the two is that stockholders possess an equity stake
in the particular company, whereas bondholders are creditors of the company.
Another difference between stocks and bonds is that bonds have a set return or
maturity after the bond term is fulfilled. Stocks, on the other hand, fluctuate
in regards to return and are susceptible to drastic price changes depending on
the well-being or success of the particular company.
