Bonds are shares of debt that are issued by a corporation or government to investors. By convincing investors to purchase the bonds, an entity can raise money for itself without borrowing from a bank or issuing stocks. An interest rate is paid, and independent rating agencies work to help set the rate by estimating and calculating the risk that the issuer will default. Bonds are considered by many to be safe from an investor's perspective relative to other forms of securities including stocks.http://www.youtube.com/watch?v=-optnoZrz2Q
Personal Finance & Investing : How Do Bonds Work?
Mark Griffith talks about how bonds work. A bond is simply a way of borrowing or lending money. However, rather than borrowing from a bank, a large company may issue bonds in order to raise capital. Investors, including the general public, can buy these bonds as "shares" of the debt. Bonds have an interest rate written into them that as predetermined based on the perceived risk of the loan.
Government Bonds
Big corporations aren't the only entities that can issue bonds. Governments and municipalities may also issue bonds in order to raise money to cover temporary shortfalls or to fund new projects. However, bonds issued by governments aren't necessarily risk free. The United States and the United Kingdom are the only two countries in the world that have never defaulted on their bonds, and there's always a risk that the issuing company, country or other entity will run into financial trouble down the road.http://www.youtube.com/watch?v=-optnoZrz2Q
Disclaimer
The content in this page is not a substitute for professional financial advice. Please contact a finance professional before using the information presented here.
References
Fast Facts
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Fact:
Both governments and corporations can issue bonds
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Fact:
The cash value of a bond may not be redeemed from the issuer until the maturity date
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Fact:
Many governments around the world have, at one point or another, defaulted on bonds issued
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Fact:
Issuing bonds allows an entity to borrow money without using venture capital or a bank
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Fact:
Credit rating agencies assess the risk levels of new bond offerings
