The next time you turn on a water faucet, drive down a newly paved road, read about a company expanding its operations, or drop you kids off at school, there’s a good chance that bonds played a part in making each of these a reality. Even larger than the stock market, the bond market is the largest securities market in the world and plays a vital role in the global economy and in our everyday lives.
A bond is a loan that the lender makes to the borrower. Governments, municipalities, corporations, federal agencies, and other entities issue bonds when they need capital to finance specific projects or general operations.
Like a loan, a bond pays a specified interest rate over the life of the bond and repays the principal amount at a stated time. The timing of principal payments can vary greatly depending on the type of bond being issued. Obligations similar to bonds can also be called bills, notes, certificates, leases, debt securities, or debt obligations. For simplicity sake, we refer to all of these as “bonds.”
Types of Bonds
“Government bonds” is a general term that encompasses a wide range of bonds issued by a variety of governmental entities.
Corporations issue bonds to fund new business ventures, expand operations, and purchase equipment.
During this process, cash flows from various types of loans are bundled together and sold to investors as securities.