Bonds Definition 

The word “bonds” itself has many meanings besides those which are related to the world of high finance.  The word “bonds” in its plural form, as a noun, refers to things which are used to tie or hold something together. “Bonds” may also be chemical, but as a whole a “bond” ties, affixes, joins connects or fastens one thing to another.

In the legal sense a Bond is debt investment, in which an investor or investment banker, loans a sum of money to a corporate or governmental organization.  What exactly is a bond?  To describe this transaction, one would say that the governmental or corporate organization has borrowed a sum of money at a certain rate of interest, which it must repay within a fixed period of time.

Bond Issuance

Although this may seem to be a fairly straightforward process, governments or large corporations may also sell bonds to the public and this type of transaction is government bonds definition. Therefore an organizations that deals in bonds issuance may, by necessity call in specialized financiers, or investment bankers to facilitate the issuance of these bonds.  Investment bankers will inform the bonds’ issuer about the likely issuing price, which will be affected in turn by the status of the financial marketplace.  The bond issuer does not sell the bonds, but relies on the services of a knowledgeable intermediary to carry out this process for them.  Therefore, in legal terminology, the “obligor” is the Issuer of the bonds and the “obligee” definition describes one who is protected by the bond.

Surety Bond Definition

The definition of surety is some entity that guarantees the payment of a debt instrument.  The The best way to define surety bonds is to say that they are: 1. “A third party agreement that legally binds together a principal who needs the bond, an obligee who requires the bond and a surety company that sells the bond.” The surety is a form of guarantee which holds that the principal, as mentioned in this definition, will obey the laws pertaining to this situation, or if this does not occur, the surety will cover the costs of the damages or losses which may result.  Thus, to define surety, a bank, or a bonding or insurance company agrees to be ultimately liable for the obligations of another entity.

Security Bonds

A security bond is a bond which is backed by the issuer’s specific assets.

Term Bonds

Term bonds may be a by-product of a previously granted bond, in that it is of the same issue as a previous bond. A term bond may share the same maturity date as this previous bond, and/or it may have added to it a call feature which states that it can be redeemed at an earlier date than the other bonds granted from the same issuer.  This call feature or call provision is an agreement made between the bonds’ issuers and its buyers.

Having defined the basic terms regarding the issuance of bonds, it becomes clear that there are many types of bonds.

Foreign Bonds

Foreign bonds are a type of bond that may influence the domestic or national economy. This bond is issued in the currency of the domestic or national market, by a corporation from outside it, in other words by a corporation or business person from overseas. Foreign bonds are always regulated by the laws of the domestic economy in which they are bought or sold. They may also be susceptible to higher risk levels because of their links to foreign exchange rates.

What are Government Bonds?

Government bonds by definition are bonds sold by a national government, or a municipality, to investors.  These investors may then be paid a regular interest rate on the bond or loan of money to the government and they are also entitled to receive full repayment of the sum of money of which the bond was initially comprised.  These types of bonds are considered to be a safe or secure investment as they depend on the funds in the treasury of the nation, but this may not always be the case.  Some nations may have a failing national economy which may cause a default on all debts including all government bonds.

Municipal Bonds or Muni’s

Municipal bonds are issued at state municipal or regional level, to finance regional or county works such as roads, bridges, schools and governmental buildings.

Treasury Bonds

On the other hand, treasury bonds have been considered to be especially safe.  These bonds are issued by the treasury of the US government and they hold the “full faith in, and credit of the government” as a confirmation or assurance of payment.  These bonds may have a maturity date of more than seven to ten years, while an interest rate maybe paid semi-annually.  These US treasury bonds are also exempt from all local and state taxes and need only submit taxes at federal level. T-Bonds, as they are called, are sold through auctions with a minimum denomination of $1,000 per bond and after the initial purchase they are able to be sold on in a secondary market.

The stocks and bonds by definition are both very similar, in that their purchase may result in monetary acquisitions which become part of a business person’s financial portfolio, there are many differences in their actual potentials for the risk and return of an initial investment.  One of the major differences between stocks and bonds is that the Stock market as it is called, is a centralized trading system which allows investors to closely watch and if possible protect, their investment.  Trading in bonds does not include this kind of regulatory system.  Both of these financial transactions are called securities, but stock or shareholders own a stake, or equity, in the company they have invested in.  Traders on the stock market are known as investors, while traders in bonds are called speculators.  Stock trading has higher level of potential liquidity, or ability to convert shares and equities into cash.  Bonds are considered to be a type of loan and their issuance will appear in the debts column of an accounting spreadsheet.

Bond Funds

Separate to all the types of bonds mentioned so far is the bond fund. In answering the question, “What is a bond Fund?” we discover that a bond fund will actually invest in bonds and other instruments of debt.  These may consist of government bonds, municipal bonds, corporate bonds or mortgage backed securities.  Bond funds are dissimilar to stock funds, though they may pay periodic interest on the bond’s principal securities.