In the financial world, what bonds and what do they represent? In simple terms, bonds are debt instruments that are issued by the issuer of the bond. In financial circles, a bond is actually a document of indebtedness of the issuer of the bond to the holder of the bond. The most usual types of bonded bonds are municipal bonds and corporate bonds. Usually, bonds are also in the form of certificates. However, bonds are available in both kinds.
Definition of Bonds
- In financial circles, a bond is a financial instrument of debt debt instrument of a financial entity to the holders called bondholders. These holders are typically interested parties that agree to repay the issuer when the issuer is due to pay back monies lent to them. The most popular forms of bonds are corporate bonds and municipal bonds. Corporate bonds are issued by companies as an obligation for future payment. Municipal bonds are issued by governmental bodies as a means of issuing tax-free municipal revenue.
- In basic economics, a bond is a financial instrument of an issuer based on a promise to pay. Typically, the most popular forms of bonded debt are corporate bonds and municipal bonds. Other common forms of bonded debt are corporate risk retention bonds, interest-only bonds, debt securities, and interest-only bonds.
A municipal bond is actually a type of loan whose interest rates are set by the local governing body that governs the district where the bonds are issued. Examples of such local governing bodies are cities, counties and states. Generally, these bonds are issued by local governments. Usually, the purpose of issuing such bonds is to raise funds for specific projects within the jurisdiction. For instance, a school in Birmingham, Alabama may issue bonds to raise funds for the capital of the school.
On the other hand, what are bonds in regards to corporate bonds? Bonds in this category generally belong to the ownership segment of the business. As such, the individual holding the bond as owner usually exercises the power of ownership rather than the power of trust. To illustrate, if you are an individual saving for retirement, then you would have the power of trust but not the power of ownership. Likewise, if you are an individual stockholder in a corporation, you would have the power of ownership but not the power of trust. This is the reason why corporations tend to offer long-term bonds in order to retain their clients.
As an investor, you too could exercise the power of ownership by purchasing bonds of any type offered to you. If you do so, then you will become a co-owner of that corporation. As a matter of fact, you will hold shares in that corporation and therefore your bond investment will be classified as a share in that entity. So when the corporation pays you a dividend, it is generally on a regular basis.
On the other hand, in a partnership, you and the other partners share the profits. The profit will ultimately be divided among the partners. Similarly, in a limited liability company, or LLC, each partner has a separate tax ID number and is responsible for his or her own taxes. When these companies create dividends, the profit will also be divided among the partners. Thus, in general, partnerships result in a much higher rate of return than individual stocks.
The maturity date of a bond can vary from one issue date to another. The amount of principal and interest accumulated on any particular date will determine when it is payable. Bond dealers can provide information on each issue date. You can usually find them on the back of your most recent bond report.
One last point about buying bonds: when you buy bonds, make sure you get all the relevant information about the issuer first. You need to understand how their business model works so that you will know what their financial statements say. It may sound silly to mention this, but there are some investors who focus on the issuer’s financial performance compared with their peers. By doing this, you will have a better understanding of what is bonds and how to buy them.
Finally, the very last thing that you should know about what is bonds is that different types do different things. There are treasury bonds, corporate bonds, municipal bonds, etc. Each type serves a purpose and carries a specific risk. Make sure you are clear about what your goals are regarding investment in bonds before you go into the process. If you keep the above mentioned points in mind, you will surely be able to understand what is bonds better and invest in them accordingly.