Bond FAQs

Bonds are simply a loan, an investor owned utility (IOU) in which an investor loans money to government agency or to a company for a period of more than one year. In return, the agency or company issues bonds that promise to pay original principal along with interest on a specified date called maturity date.

What are the different types of bonds?

Bonds are classified into different categories based on credit quality, tax status, issuer type, maturity and secured/unsecured. Fixed rate bonds, high yield bonds, inflation linked bonds, zero coupon bonds, asset-backed securities, subordinated bonds, and perpetual bonds are some of the different types of bonds.

Who issues bonds?

Bonds are issued by governments, corporations or companies, government sponsored entities in the U.S such as Federal Home Loan Mortgage Corporation; municipalities, supranational agencies such as the European Investment Bank or the Asian Development Bank; credit institutions, and a variety of institutions.

Why bonds are issued?

Government entities and corporations need to raise money for their endeavors. For instance, if a corporation needs to build a new office building or if government needs to construct a new school or repair streets, they require money to get the work done. To meet their need, they borrow money from the public and in return they issue bonds.

What is the difference between Stock and Bond?

A major difference between stock and bond is that bond promises to return entire principal amount along with interest where as stocks make no promises about dividends or returns. Bonds have finite lifetime, stocks do not.

Who buys bonds?

Any US resident or citizen can buy bonds. There are many reasons for purchasing bonds. Some buy bonds as savings for retirement while some others purchase bonds for college education. Banks, money market funds also purchase bonds.

Where can I purchase bonds?

Similar to stocks, bonds are also purchased from open market. They are traded mostly by banks, insurance companies, pension funds, credit unions, and savings institutions. Bonds can also be purchased online.