You'll be an expert in no time!Ī surety bond (pronounced " shur-ih-tee bond") can be defined in its simplest form as a written agreement to guarantee compliance, payment, or performance of an act. See also OPEN MARKET OPERATION, BANK DEPOSIT CREATION, PUBLIC SECTOR BORROWING REQUIREMENT, SPECULATIVE DEMAND FOR MONEY, CONSOLS.Learn the surety bond basics with an easy-to-read overview of surety. For example, if the authorities wish to reduce the money supply, they can issue bonds to the general public, thereby reducing the liquidity of the banking system as customers draw cheques to pay for these bonds. In addition to their role as a means of borrowing money, government bonds are used by the monetary authorities as a means of regulating the MONEY SUPPLY. For example, a £100 bond with a nominal 5% interest rate paying £5 per year would have to be priced at £50 if current market interest rates were 10%, so that a buyer could earn an effective return of £5/50 = 10% on his investment. Once a bond has been issued at its nominal value, then the market price at which it is sold subsequently will vary in order to keep the EFFECTIVE INTEREST RATE on the bond in line with current prevailing interest rates. Bonds are typically issued for periods of several years they are repayable on maturity and bear a fixed NOMINAL ( COUPON) INTEREST RATE. © 2002, 2005 C Pass, B Lowes, A Pendleton, L Chadwick, D O’Reilly and M Afferson bond a FINANCIAL SECURITY issued by businesses and by the government as a means of BORROWING long-term funds. See also EUROCURRENCY MARKET, GILT-EDGED SECURITY.Ĭollins Dictionary of Business, 3rd ed. In addition to their role as a means of borrowing money, the sale and purchase of bonds is used by the monetary authorities to control the MONEY SUPPLY. For example, a £100 bond with a nominal 5% interest rate returning £5 per year would have to be priced at £50 if current market interest rates were 10% so that a buyer could earn an effective return of £5/£50 = 10% on his investment. Bond prices tend to fluctuate at prices below their face value, reflecting buying and selling strengths, but are closely linked to prevailing market interest rates so as to remain attractive to potential buyers. Once issued, bonds can be bought and sold on the STOCK MARKET. Purchasers of bonds include private individuals, commercial banks and institutional investors (pension funds, etc.) who hold them as a form of portfolio investment. They are issued in units of a fixed (nominal) face value and bear a fixed (nominal) rate of interest.
Bonds are, typically issued for a set number of years (often 10 years plus), being repayable on maturity. bond a FINANCIAL SECURITY issued by a company or by the government as a means of borrowing long-term funds. Along with cash and stocks, bonds are one of the basic types of assets.ĭictionary of Financial Terms. Other common types include callable bonds, which allow the issuer to repay the principal prior to maturity, depriving the bondholder of future coupons, and floating rate notes, which carry an interest rate that changes from time to time according to some benchmark.
The most basic division is the one between corporate bonds, which are issued by private companies, and government bonds such as Treasuries or municipal bonds. There are several different kinds of bonds. The higher the interest rate on a bond is, the more risky it is likely to be. The interest rates on Treasury securities are considered a benchmark for interest rates on other debt in the United States.
Generally speaking, a bond is tradable though some, such as savings bonds, are not. In addition, the bondholder usually has the right to receive coupons or payments on the bond's interest. In exchange, the bondholder receives the principal amount back on a maturity date stated in the indenture, which is the agreement governing a bond's terms. When a company or government issues a bond, it borrows money from the bondholders it then uses the money to invest in its operations. A security representing the debt of the company or government issuing it.
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