Bond (finance)

A bond is a contract between two parties. The issuer of the bond borrows money from the buyer of the bond.

Companies or governments issue bonds because they need to borrow large amounts of money. The bonds are bought by investors. The issuer of the bond promises to repay the debt, plus interest, to owner of the bond. If the issuer doesn't repay then the holder of the bond can get a court to make them; an issuer may go bankrupt if they cannot afford to repay.

Most bonds have a fixed term, which means that the principal is repaid after a specified number of years. The issuer of the bond makes an annual payment to owner of the bond in the meantime - this is called the coupon and acts as interest. Because the amount of the coupon is fixed, the value of the bond can be affected by changes in the interest rate.

Some bonds stipulate that the principal is repaid only at the discretion of the borrower - these aer called perpetual bonds. The oldest bound in the world, which is still paying interest, was issued in 1624 by the Hoogheemraadschap Lekdijk Bovendams to fund repairs to flood defences on the Lek river, south of Utrecht.^[1]

Bonds are usually traded through banks and other financial entities and are part of a financial instrument group called Fixed Income. Banks and financial institutions offer loans on different terms against the security of assets.