Money has found a way to create financial instruments that we use everywhere around the world but are more commonly used in the United States. Some of these instruments include stocks, mutual funds, cds, real estate, bonds, retirement accounts, money market accounts, among others. Most people understand what most of these are, but some are still clueless about bonds because it sounds like the bond that one makes with a family member or a pet, but financially, they are more complicated than that.
The word bond is defined as “a thing used to tie something or to fasten things together”. It also means an agreement where legal force is adopted. They are both very close to the finance term because a bond is a debt instrument given to the investors or holders by the debtor. If we look at the first definition, “a thing used to tie something”, a financial bond is used to tie the holder to the debt. This is not a bad thing for the holders of the bond, but it is for the person issuing it. The person or company issuing a bond is tied to the holders and must repay them their investment plus the agreed interest or added payment.
In reality, a bond is just another word for a loan, just like in the real estate business, a mortgage is another word for a loan on a house. The main difference between a bond and a stock is the fact that a stock is a debt on the equity of a company which means they own part of a company, while bonds are only debt and have zero ownership like bid bonds NY. When preparing to pay debts, bonds are always paid first because they are a third party and not owners.
Another difference between bonds and stocks is that bonds have a certain maturity date. A date when the bond is no longer valid, and the debt must be paid. In case a company was to go bankrupt, bond holders would get paid before stock holders, but secured loans would be paid before bond holders. Bonds are not secured and, in many cases,, the issuer of the bond must pay a certain amount of interest throughout the term of the bond to the bond holder. There are many more traits of bonds that you can research because a term so simple contains more complicated processes.
In conclusion, this article touched upon some of the different investments out there, which in reality are just debt instruments used to incur debt from the holder of the paper bond, mortgage, stock, etc. In this particular case, bonds were described as they are, unsecured loans that create interest paid by the issuer of the bond which can often be sold as securities by brokers and other financial institutions. If someone offers you a bond you now have some information to make a decision but do more research please.