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 A 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 bonds require 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 kind of 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 shareholder in the case of financial distress (this is true for all creditors). Bonds are often divided into different categories based on tax status, credit quality, issuer type, maturity and secured/unsecured (and there are several other ways to classify bonds as well). U.S. Treasury bonds are generally considered the safest unsecured bonds, since the possibility of the Treasury defaulting on payments is almost zero. The yield from a bond is made up of three components: coupon interest, capital gains and interest on interest (if a bond pays no coupon interest, the only yield will be capital gains). A bond might be sold at above or below par (the amount paid out at maturity), but the market price will approach par value as the bond approaches maturity. A riskier bond has to provide a higher payout to compensate for that additional risk. Some bonds are tax-exempt, and these are typically issued by municipal, county or state governments, whose interest payments are not subject to federal income tax, and sometimes also state or local income tax.

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Definitions (5)

1. General: Written and signed promise to pay a certain sum of money on a certain date, or on fulfillment of a specified condition. All documented contracts and loan agreements are bonds.

2. Construction industry: Three-party contract (variously called bid bond, performance bond, or surety bond) in which one party (called the surety, usually a bank or insurance company) gives a guaranty to a contractor's customer (called 'obligee') that the contractor (called 'obligor') will fulfill all the conditions of the contract entered into with the obligee. If the obligor fails to perform according to the terms of the contract, the surety pays a sum (agreed upon in the contract and called 'liquidated damages') to the customer as compensation. Surety bond is not an insurance policy and, if cashed by the obligee, its amount is recovered by the surety from the obligor.

3. Litigation: (1) Appeal bond deposited by a losing party to stay the execution of a lower court's judgment until the party's appeal against it is decided by a higher court. (2) Bail bond deposited by an accused as a guaranty of his or her appearance in the court when called. (3) Judicial bond deposited by a litigant party to indemnify the opposing judicial or governmental body from any loss arising due to the legal proceeding.

4. Securities: Debt instrument which certifies a contract between the borrower (bond issuer) and the lender (bondholder) as spelled out in the bond indenture. The issuer (company, government, municipality) pledges to pay the loan principal (par value of the bond) to the bondholder on a fixed date (maturity date) as well as a fixed rate of interest (paid usually twice a year) for the life of the bond. Alternatively, some bonds are sold at a price lower than their par value in lieu of the periodic interest; on maturity the full par value is paid to the bondholder. Bonds are issued in multiples of $1,000, usually for periods of five to twenty years but some government bonds are issued for only 90 days. Most bonds are negotiable, and are freely traded over stock exchanges. Their market price depends mainly on the rating awarded by bond rating agencies on the basis of issuer's reputation and financial strength. Investment in bonds offers two advantages: (1) known amount of interest income and, unlike other securities, (2) considerable pressure on the company to pay because the penalties for default are drastic. The major disadvantage is that the amount of income is fixed and may be eroded by inflation. Companies use bonds to finance acquisitions or capital investments. Governments use bonds to keep their election promises, fund long-term capital projects, or to raise money for special situations, such as natural calamities or war.

5. Trading: Bank guaranty posted by an importer for an immediate release of landed goods (with total value not exceeding the amount of bank guaranty) without payment of customs duties and taxes. The bond allows a fixed period during which the importer must submit the required documents and pay the assessed duties and taxes. See also bonded goods.