- A bond is a loan under a different guise. A bond is a security issued to by an authorized entity, promising to repay borrowed money under set terms (the most important being interest and duration) on a given date. That date is referred to as the bond's maturity.
In terms of being a security, bonds are different from stocks (the other major form of security) in two ways. First, a bond-holder is a lender to a company or government, where a stockholder is a part-owner. Second, stocks are indefinite, whereas bonds are for a set length of time. - In the United States, bonds are most frequently issued by the Federal Government, state and local governments, and corporations. The Federal Government generally issues bonds in order to raise money for covering budget deficits. States, municipalities, counties, and local agencies may do this too, but more frequently they issue bonds for a specific project, such as building a bridge. Corporations issue bonds to raise capital for investment or expansion.
- A bond is a reliable, low-risk investment tool. In its simplest form, a bond has three features: the interest rate, the date of maturity, and the denomination. So a $1,000 bond issued at 3.75% interest for 15 years will pay either compound or simple interest on the bond amount until the date of maturity, 15 years later.
Given the variety of bonds and bond issuers available, there is also a variety of special terms that may or may not apply to a given bond. For example, state and municipal bonds are often exempted from income taxes. A corporate bond may have terms that allow for its conversion into that corporation's stock under special rates.
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