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Bonds Defined

A bond is a debt investment, where an investor loans money to a corporate or government entity, for a defined period of time, at a fixed interest rate. Companies, cities, states, along with federal and foreign governments make use of bonds to finance a number of projects. Bonds are known as fixed-income securities and are one of the three main asset classes, alongside cash and stocks.

An issuer, issues a bond that states the interest rate that will be paid, and when the money loaned is to be returned. The interest rate is known as the coupon, and the loaned funds are known as the bond principal. The date at which the funds are due to be paid back is known as the maturity date. Interest on the bonds is typically paid on a semi-annual basis, or once every six months. The amount of interest varies based on the strength of the entity receiving the money. Larger companies that are much less likely to default on the debt will pay lower interest rates than a startup company would.

There are three types of bonds: corporate bonds, municipal bonds, and U.S. Treasury bonds. Depending on the type of bond, you may have anywhere from a 90-day, to a 30-year range. Corporations and cities usually have bonds lasting anywhere from three to 10 years. Essentially the bond is an IOU, from the recipient to the investor, which promises the recipient will pay back the investor, with interest, by the time specified.

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