A bond is a financial instrument representing a loan by an investor to a borrower. The borrower may be a corporation, government, or any other entity.
When you purchase a bond, you are lending money to the issuer, and he/she undertakes to repay you the amount of principal (the initial amount of the loan) on a future date (the maturity date), as well as regular interest payments (coupon payments) throughout the term of the bond.
Why Are Bonds Issued?
Often, a firm must raise funds from external sources for operations, acquisitions, or expansion. One method to accomplish this is by issuing shares. Investors give capital to a firm in exchange for shares of stock that represent their ownership stake.
Borrowing the funds and repaying them at a later period is a further option for raising capital. The corporation may obtain a loan for the whole amount required from banks and other traditional lending institutions.
Bonds, which are also a kind of debt, offer a further option for the firm. Bonds are loans issued by smaller lenders, including other businesses and private individuals. Typically, corporate bonds are issued in $1,000 increments.
A business may borrow from several smaller investors in order to raise the required amount of capital. Similar to how corporate stock is traded on the stock market, corporate bonds are exchanged on the bond market. They are long-term obligations for most of their existence and only become current liabilities one year before to maturity.
Bondholders are the individuals or entities that acquire bonds from a firm; they are effectively lending their money as an investment. The reason bondholders lend their money is that the firm pays them interest on the amount they lend for the duration of the bond’s tenure. Unlike investors, bondholders do not become owners of a business.
Conclusion
A Bond is a loan made by a lender to a borrower. In return, the borrower has agreed to pay back the loan. Lenders and borrowers are called the Bondholder and Bond Issuer, respectively. Bonds are also referred to as fixed-income securities.
