A bond is a security which serves as a guarantee of debt payment. It is a financial device used for various parties to borrow money, explains IronFX.
When a bond is issued, the issuer receives a sum of money from the buyer in advance, and usually commits, in return, to pay the sum stated in instalments (sometimes with added linkage), and interest, at future dates stated on the bond.
The two most popular types of bonds are those issued by large companies and government agencies. Most bonds are negotiable and can pass through several pairs of hands from the time they’re issued until the time they are redeemed, explains IronFX. Trading bonds until they mature is usually done on the bourse. Bourse trading doesn’t change the redeeming value of the bond (principal and interest), and represents only the supply and demand during its lifespan. Supply and demand represent the combination of guaranteed redeeming values on the bond, the confidence the bondholder has in the issuer’s ability to uphold their commitment, and the market conditions at the time. If there are alternatives that yield similarly with lower risks, or have greater yield with similar risks, the bond’s trading value will go down, states IronFX. As opposed to buying shares in a company, the owner of a bond does not become part of a company, rather, its debtor.
There is no requirement for security or guarantee of payment, but sometimes these are defined in order to lower the risk for the buyer. A bond is similar in nature to a promissory note, but is different in several ways, mainly, the number of bond holders, as opposed to the note, which is usually held by an individual, either a person or a corporation, and in that bonds are more negotiable, explains IronFX. One familiar type of bond is a mortgage bill, where a person borrows money from the bank or a government agency, pays their debt in instalments with interest, and as guarantee of payment, mortgages property (usually real estate property, the purchase of which was the reason for the loan).
Properties of Bonds
Bonds are issued by government agencies, other public authorities, and companies, states IronFX. Banks and credit institutions do not issue bonds, rather, they use capital notes, since they cannot mortgage their assets. The bonds are sold to the public by bourse members. For the borrowers, the bond serves as a means of recruiting long-term loans without changing the structure of ownership in their company (as would happen with stocks).
The bonds are usually held by institutional investors (provident and pension funds, study funds, and trust funds) for their investors, using their funds, states IronFX.