Term of the Day

bond

debt instrument issued for a period of more than one year with the purpose of raising capital by borrowing. The Federal government, states, cities,corporations, and many other types of institutions sell bonds. Generally, a bond is a promise to repay the principal along with interest (coupons) on a specified date (maturity). Some bonds do not pay interest, but all bondsrequire a repayment of principal. When an investor buys a bond, he/she becomes a creditor of the issuer. However, the buyer does not gain any kindof ownership rights to the issuer, unlike in the case of equities. On the hand, a bond holder has a greater claim on an issuer’s income than a shareholderin the case of financial distress (this is true for all creditors). Bonds are often divided into different categories based on tax statuscredit quality, issuertypematurity and secured/unsecured (and there are several other ways toclassify bonds as well)…
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Usage Example
Governments issue bonds to their citizens to help fund projects when they don’t have enough cash on hand with a promise to repay the principal.
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