Bonds are forms of debt security issued by the organizations and governments that can be sold to investors for investment. A bond is essentially a type of loan from the issuer’s perspective. When an organization requires funds to complete a business process, it can issue bonds for people to invest in. After the loan period is over, the company pays back the investor in full. During the period of the loan, the company pays interest to the investor, which is often known as a coupon.
There are four main issuers of bonds:
- Corporate bonds - these are bonds issued by firms in order to secure capital for their business processes.
- Municipal bonds - these types of bonds are issued by municipalities, some of which even offer tax free coupons for investors.
- Government bonds - these are bonds usually issued by the US treasury. Government bonds usually have a maturity (period of time within which the investor receives interest payments) of greater than 10 years. If the maturity period lasts less than 10 years, they are referred to as ‘notes’.
- Agency bonds - these are bonds issued by organizations that are affiliated with the government.
Bonds can be purchased through various electronic markets, however they do come along with fairly high commissions. It is therefore important to always study the details of a bond before investing in it.