Bond Definition

• A bond is an investment security that allows the issuer to raise funds through debt financing. Debt financing is when a party borrows money from another party and agrees to pay it back plus interest according to a certain schedule. Individuals may not publicly issue bonds; only legitimate companies and governments may do so.
  
  

Interest Rates

• When you purchase a bond from a company or government and place it in your portfolio, you do so trusting that the issuer will remain financially solvent and be able to repay its debts. Since issuers have varying levels of financial stability, they issue bonds with varying interest rate levels. Issuers that can prove a higher level of financial stability, such as governments, tend to pay lower interest rates. Issuers that constitute a higher level of risk on the part of the investor tend to pay higher interest rates.
  
  

Bond vs. Stock

• People often buy and sell bonds and stocks through the same securities markets, and investors often put money into both, including both in their investment portfolios. However, despite their similarities as investment securities, bonds and stocks are different. While issuers use bonds for debt financing, they use stocks for equity financing. Instead of standing as evidence of money owed, stocks represent partial ownership in corporations. While a bond represents an agreement that the issuer will pay the bond holder a certain amount of money at a certain time, a stock gives its holder the right to collect a certain percentage of corporate profits. While governments often issue bonds, they do not issue stocks.
  
  

Bonds vs. Loans Issued

• Companies may engage in debt financing by either issuing bonds or receiving loans from commercial lenders. Bonds came into existence for the purpose of giving companies access to funds outside of the conventional lending marketplace, allowing private investors to lend money alongside multinational banks. This is because the process of lending and collecting on conventional loans tends to be too problematic for independent investors. However, recent developments in Internet-based technology have allowed private investors to become lenders for other private parties without purchasing bonds.
  
  

Nature of Return

• While those who borrow money from lenders tend to make payments on those loans on a monthly basis, bonds usually stipulate payment on a biannual basis. Compared to stocks, bonds tend to constitute a lower level of risk because, when corporations liquidate their assets, they must pay off all debt liabilities before making any payments to stockholders.