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Bonds

Most of us have borrowed money at some point of our life, whether as kids from our parents or have asked the bank for a mortgage as grownups. Companies and governments also need money as we do. A company needs to expand into new markets and requires funds for that. Governments need money to run their infrastructure and social programs.

The large organizations need far more money than the average bank can provide. So, they have to raise money finding other solutions. They raise money by issuing bonds to a public market. Thousands of investors lend a portion of the capital needed to the company.

A bond is nothing more than a loan for which you are the lender. The organization that sells a bond is known as the issuer. You can think of a bond as an IOU given by a borrower (the issuer) to a lender (the investor).

But of course, nobody would lend their hard earned money for nothing. The issuer of a bond must pay the investor something extra for the privilege of using his or her money

Investors get their extras in the form of interest payments, which are made at a predetermined rate and schedule. The interest rate is often referred to as the coupon. The date on which the issuer has to repay the amount borrowed is called the maturity date.

Bonds can be issued by corporations, states, cities, and the federal government. The interest on bonds is usually paid quarterly, but is sometimes paid at the date the bond matures, when the borrower pays you back the principal you lent them. Bonds are also known as fixed-income securities because you know the exact amount of cash you'll get back if you hold the security until maturity.

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