What Is a Bond?

A bond is a fixed-income instrument that represents a loan made by an investor to a borrower (typically corporate or governmental). A bond could be thought of as an I.O.U. between the lender and borrower that includes the details of the loan and its payments. Bonds are used by companies, municipalities, states, and sovereign governments to finance projects and operations. Owners of bonds are debtholders, or creditors, of the issuer.

Bond details include the end date when the principal of the loan is due to be paid to the bond owner and usually include the terms for variable or fixed interest payments made by the borrower.

Categories of Bonds

There are four primary categories of bonds sold in the markets. However, you may also see foreign bonds issued by global corporations and governments on some platforms.

• Corporate bonds are issued by companies. Companies issue bonds rather than seek bank loans for debt financing in many cases because bond markets offer more favorable terms and lower interest rates.
• Municipal bonds are issued by states and municipalities. Some municipal bonds offer tax-free coupon income for investors.
• Government bonds such as those issued by the U.S. Treasury. Bonds issued by the Treasury with a year or less to maturity are called “Bills,” bonds issued with one–10 years to maturity are called “notes,” and bonds issued with more than 10 years to maturity are called “bonds.” The entire category of bonds issued by a government treasury is often collectively referred to as "treasuries." Government bonds issued by national governments may be referred to as sovereign debt.
• Agency bonds are those issued by government-affiliated organizations such as Fannie Mae or Freddie Mac.