What is a Bond

Bonds can be defined as debt instruments yielding a fixed rate of return over a set period of time that can be traded in the market like any other security. Bonds are essentially a loan the issuing organization receives from the investor who in turn becomes the creditor.
Bonds typically have a maturity period during which they cannot be normally traded for full value unless specified otherwise. The rate of return offered by bonds will be lower compared to stocks due to bonds offering security against turbulent markets.

Returns on bonds are disbursed periodically, bi-annually, tri-annually, or quarterly, depending on the issuer’s offer By comparison, a stock is a share of the issuing organization’s ownership equity, which the investor owns when he buys it. The difference in the respective returns of bonds and stocks are a matter of investment goals.

Bonds yield smaller returns for very low risk while stocks offer higher returns for greater risk.Among all the bondsissued by governments around the world, US Treasury Bonds are considered to be the safest and strongest.
This has been evidenced by the massive investment in US Treasury Bonds by the government of China, as well as many other governments around the world.
Bonds are issued through the process of underwriting. During the process of underwriting, one or many banks, create a syndicate and buy an entire issue of the bond from an issuer. Then the bonds are again resold to the investors.
There are different types of Bonds:

Secured Bond
Such bonds attach the guarantee of fixed assets to the value of the bond. This gives the investor a guarantee that if the issuing organization defaults in the payment of principal and interest when they are due the property attached as a guarantee could be taken over by the bondholder.
Callable Bond
Certain bonds can be redeemed before maturity by paying a penalty or an early redemption charge. Such conditions are predetermined at the time of the transaction.
Commercial paper
An investor may agree to lend credit to an organization for a short period of time in return for a mutually agreed rate of interest. Most commercial papers are negotiable instruments.

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Last Updated on : 10th July 2013

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