Debt Dictionary


Investment Dictionary -> Bond

The bonds are a form of debt security in which the issuer owes a debt to the bondholders. The issuing institution will repay the principal at a fixed date, named maturity date. Depending on the term of the bond, we can differentiate between three categories of bond maturities. Bills will have maturities up to one calendar year. Notes will have maturities in the range of one to ten years. The maturity of bonds will exceed ten years.

The issuing body can be a company, credit institution, government authority, or supranational structure. Furthermore, the issuer is bound to pay interest to the holders of bonds. In principle, they turn into creditors while the issuer becomes the debtor. The holder uses the bonds as a form of instrument for external financing.

Similarly to stock, the bonds represent securities. The difference between both tools is that the bondholders are creditors whereas the stockholders have an owner`s equity in the enterprise. In terms of bonds categorization, there is a great variety of bonds. Fixed rate bonds have a coupon or interest rate that remains unchanged during the life of the bond. The coupon of the floating rate notes is recalculated according to determined interest rate index. The inflation linked bonds tie the principal and the interest payments to inflation. Some bonds, such as the perpetual bonds, have no maturity date.

Similarly, ultra long-term bonds may reach maturity in a couple of centuries. The West Shore Railroad has issued bonds that will mature in 2361. Another type is the municipal bond. This debt security can be issued by government structures, cities, local authorities and their agencies. The municipal bonds are typically exempt from income tax. The revenue bond is a special sub-category of the municipal bonds. The repayment guarantees are based on a certain revenue generating structure which matches the purpose of the revenue bonds. The lottery bonds are usually issued by European states. The issuing body redeems randomly picked bonds within the issue. The principal and the interest payments of the asset backed securities are guaranteed by cash flow from other assets. Finally, the war bonds are issued by states for the purpose of funding military operations.

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