Bonds — An Intro
I was going through my archives and found this from when I was studying debt products for a project. I just glamorised it a bit for the Pensieve.
Bonds — Issued by a company or govt body to raise money, a form of debt.
What stocks are to equity, bonds are to debt.
Debt is money borrowed from lenders/investors to expand your venture and you promise the lender/investor to return it. You pay an interest on that money till you finish paying it. E.g., the bank earns a fixed amount of interest from the money it loaned you. Once you expand your venture and generate more profits, say which are higher than the interest that you’re paying the bank, then you end up keeping more profits for yourself. Although if you don’t make profits and lose the money, you still pay back the money you borrowed from the bank at the fixed interest rate, or the bank will follow means to extract the money from you.
Bonds (Securities for Debt) are financial instruments/tools/products which you may use to raise money for expanding a venture from individual investors instead of a bank(this is what differentiates it from a loan). To these individual lenders or organisations, you issue bonds at a particular price and offer interest on it till the bond matures. The investor keeps receiving the interest every six months or at the time of maturity of bonds, depending on what kind of bond is purchased. A bond matures when it is time for you to pay the investor the principal amount borrowed at the time of issuing the bond. It is safe for the investor in the sense that the investor receives periodic interest on the money lent and at end of the term receives the principal as well. The risk the investor runs, in this case, is if the company issuing the bonds goes bankrupt, in such a case the investor loses out on the principal amount. To help avoid this, there are credit rating companies which keep a watch on the companies which issue bonds.
Physically and digitally, a Bond is a document of debt issued to an individual or an organisation by a company. It lists the interest rate which the company will pay to the bond owner, the time for which debt is raised(maturity period) and if the bond is listed, where it’s listed.
