An instrument of indebtedness of the bond issuer to the holder.

When a company, municipality, state or sovereign government wishes or needs to raise money to finance a variety of projects and activities, it may issue bonds, which are a fixed income investment in which an investor loans money to an entity. That entity – usually corporate or governmental – typically borrows the funds for a defined time period at a variable or fixed interest rate.

How do bonds work?

Bonds are an alternative to bank loans for many companies and other entities, enabling them to raise money for the financing of new projects, the maintenance of ongoing operations or the refinancing of existing debts. The indebted entity issues a bond that contractually states the interest rate that will be paid and the time at which the loaned funds (bond principal) are required to be returned – also known as the maturity date.

Practical Application Example

“ There are various types of bonds in which you may invest, ranging from government and supranational bonds to investment-grade corporate bonds and yearlings. ”