Meaning of Bond

A Bond is a credit that an investor makes to a company, government, centralized agency, or other organization. Bonds are financial instruments that help large business houses and the state to rise finance on a large scale. It is a long-term debt security with a stated interest rate and fixed due dates, issued by a corporation or a government, when interest and principal must be paid. Bond is used as a major type of financial instrument in the market. Bonds enable the issuer to finance long-term investment with external funds.

Bonds enable the issuer to finance long-term investment with external funds. A bond fund is a collective investment scheme that invests in bonds and other debt securities. A bond is mostly just an advance, but in the form of a security, even if terms used is rather dissimilar. The issuer is equivalent to the borrower, the bondholder to the lender, and the coupon to the interest. There are no risks involved while investing in a bond. Bondholders are paid before anyone else, even stockholders and creditors, if the company runs into hard times or goes bankrupt. Returns are assured in a bond unlike other financial instruments like shares or mutual funds. Bonds give you a stream of income based on their rate of return. Bonds are usually much less volatile then stocks are.

Bonds are flexible category of financial instrument. Bonds are like stocks because they are both traded. Therefore one can buy the bonds after they are originally issued while at the same time one can sell bonds before they mature. Bond prices are subject to volatility in relation to market conditions. The demand-supply mechanism makes the price determination of the bonds. Market conditions change very rapidly and so do the needs and requirements of the investors. This leads to the change in bond prices in different types of bonds.