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In finance, a bond is a type of security under which the issuer owes the holder a debt, and is obliged – depending on the terms – to provide cash flow to the creditor (e.g. repay the principal (i.e. amount borrowed) of the bond at the maturity date and interest (called the coupon) over a specified amount of time. [1])
Bonds are an agreement between an investor and a bond issuer — typically, a company or government — that works like a loan. The investor lends a company or government money by purchasing a bond.
Put simply, a bond is an individual debt instrument, while bond funds invest in a collection of individual bonds. A bond is a contract between a borrower and a lender.
Most bonds provide fixed interest payments over the life of the bond, though some bonds are floating rate, meaning that the payment may fluctuate. In a fixed-rate bond , the payment remains steady ...
The issuer is the entity (company or government) who borrows the money by issuing the bond, and is due to pay interest and repay capital in due course. The principal of a bond – also known as maturity value, face value, par value – is the amount that the issuer borrows which must be repaid to the lender.
A company may use various kinds of debt to finance its operations as a part of its overall corporate finance strategy. A term loan is the simplest form of corporate debt. It consists of an agreement to lend a fixed amount of money, called the principal sum or principal, for a fixed period of time, with this amount to be repaid by a certain date.
Bond funds offer diversification, as they invest in multiple bonds, reducing the risk associated with any single bond defaulting. Bond funds also offer a wide range of options for investors.
In the financial sense of the word, each bond is a different slice of the deal's risk. Transaction documentation (see indenture ) usually defines the tranches as different "classes" of notes, each identified by letter (e.g., the Class A, Class B, Class C securities) with different bond credit ratings .