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In finance and economics, a bond or debenture is a debt instrument that obligates the issuer to pay to the bondholder the principal (the original amount of the loan) plus interest. Thus, a bond is essentially an I.O.U. (I owe you contract) issued by a private or governmental corporation. The corporation "borrows" the face amount of the bond from its buyer, pays interest on that debt while it is outstanding, and then "redeems" the bond by paying back the debt. A mortgage is a bond with a lien on a real estate.
Bonds are securities but differ from shares of stock in that stock is an ownership interest (termed "equity"), but bonds are merely "debt": Therefore a shareholder is an owner, but a bond-holder is merely a creditor.
Each country sets its own rules for issuing and redeeming short and long-term debt and stock. In the U.S. (for example):
Some theories of economics, notably Islamic economics and green economicsGreen economics loosely defines a theory of economics by which an economy is considered to be component of the ecosystem in which it resides. A holistic approach to the subject is typical, such that economic ideas are commingled with any number of other s, argue that the overall impact of any debt on ecosystems and society is so negative that no bond should have any legal status. These theories are part of a broader category called creditary economicsCreditary economics is a broad and inclusive term for all theories of economics and political economy that drastically de-emphasize or deny altogether a role for debt and assumptions of fixed yield for such financial capital instruments. These theories us. In these, there is no creditor, only a joint ventureA joint venture is a business relationship between two or more parties to undertake economic activity together. All parties agree to share in the profits and losses of the enterprise. The venture is for one specific project only, rather than for a continu partner or investor.
Bonds are issued by governmentsA government is an organization that has the power to make and enforce laws for a certain territory. There are several definitions on what exactly constitutes a government. The government has been defined as the dominant decision-making arm (the policy el or other public authorities, credit institutions, and companies, and are sold through bankThe essential function of a bank is to provide services related to the storing of value and the extending of credit. The evolution of banking dates back to the earliest writing, and continues in the present where a bank is a financial institution that pros and stock brokers. They enable the issuer to finance long-term investmentInvestment is a term with several closely related meanings in finance and economics. It refers to the accumulation of some kind of asset in hopes of getting a future return from it. In theoretical economics, investment means the purchase (and thus the pros with external funds. The term total volume refers to the number of individual bonds in a bond issue.
The most important features of a bond are:
The rights of a particular bond issue are specified in a written document, usually called an "indenture". In the U.S. federal and state securities and commercial laws apply to the enforcement of those documents, which are construed by courts as contracts. Those terms may be changed while the bonds are outstanding, but amendments to the governing document often require approval by a majority vote of the bondholders.
Interest is paid on the first "coupon date" and subsequently on coupon dates at regular intervals, assuming the issuer has the money to make the payments on those dates. If all interest ("coupon") payments have not been made when due, and so are in arrears, the issuer must also pay those back-due amounts when it redeems the bond, in addition to the principal ("face") amount.
The bond may have a "call" provision that allows the issuer to pay back the debt (redeem the bond) before its nominal maturity date. When there is no such provision requiring a holder to let the issuer redeem a bond before its maturity date, the issuer may offer to redeem a bond early, and its holder may accept or reject that offer.
There are three broad categories of callable bonds.
Bonds can also carry " put optionA put option is a financial contract between two parties, the buyer and the seller of the option. The put allows the buyer the right but not the obligation to sell a commodity or financial instrument (the underlying instrument) to the seller of the options", which allow the investor to sell the bonds back to the issuer at a date specified when the bonds are sold to the investor.
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