ArtsAutosBooksBusinessEducationEntertainmentFamilyFashionFoodGamesGenderHealthHolidaysHomeHubPagesPersonal FinancePetsPoliticsReligionSportsTechnologyTravel
  • »
  • Personal Finance»
  • Investing in Stocks, Bonds, Real Estate, More

Understanding Bonds

Updated on September 7, 2009

A bond, in finance, a credit instrument that contains a promise to pay a specified sum of money at a fixed date in die future. The maturity date is usually 10 years or more from the time of issue. Interest is payable periodically at a fixed rate on specific dates throughout the life of the loan. In Europe, bonds are often called "stocks," and what are called stocks in the United States are usually termed "shares".

Usually negotiable, bonds are promissory notes that are typically issued in standard denominations by corporations or governmental bodies only. Corporation bonds are based on a trust indenture (also called a deed of trust), which is an agreement between the issuing corporation and a trustee (usually a bank or trust company). The trustee manages the indenture for the benefit of the bondholders and takes appropriate remedial action on behalf of the bondholders if the issuer violates the indenture terms. The debt and the remedial action are both enforceable at law.

Uses of Bonds

Bonds are employed to enlarge the immediate financial resources of the issuer. They are intended for borrowing large sums for relatively long periods of time. The loan is broken into convenient portions (most often $1,000 in the United States) in order to reach a wider market. A purchaser of several bonds may later dispose of as many as he wishes on the market. Thus both borrower and lender benefit through the use of standard-denomination, negotiable instruments.

Bond issues are ideally suited for financing the acquisition of durable, expensive, long-term assets such as buildings, real estate, machinery, and equipment. The costs of the assets are borne as the benefits from them are received. Thus governmental bodies need hot place a heavy immediate burden on the taxpayer, and corporate stockholders need not dilute their ownership control to finance expansion.

Types and Terminology

There are many varieties of bonds, each developed to serve a particular purpose. Bonds may be classified according to type of issuer, type of security of principal, or type of security of income.

In the United States, for example, public bonds are obligations of federal, state, county, or local governments or agencies. No collateral backing is provided, and therefore the credit rating of the borrower is most important. Public bonds may be backed by the "full faith and credit" of the issuer, in which case tax revenues provide the basis for payment; or they may be revenue bonds, which call for payment from the operations of a specific facility, such as a toll bridge.

Private corporate bonds are classified as railroad, utility, or industrial bonds, according to the business of the issuing corporation. When bond principal repayment is protected by pledged property, the bonds are termed secured. In case of default, the real estate, securities, or other collateral provides a basis for repaying bondholders. The holders of unsecured bonds, or debentures, have the same status as general creditors so far as loan principal is concerned.

Coupon bonds, also called bearer bonds, are negotiable to the bearer, and the attached coupons are negotiable promissory notes to pay interest on each payment date. Registered bonds bear the owner's name, which is also registered with the issuer, and an endorsement and change of registration are required to transfer ownership. A bond may be fully registered or registered as to principal only; in the latter case the bond carries bearer coupons for interest payment.

Promissory Notes

A promissory note, in law, a written evidence of indebtedness by which the maker agrees to pay to a named person or to the bearer a fixed sum of money at a specified time. Basically it is a contract, but it also falls within the legal classification of "commercial paper". A note may be, but is not necessarily, negotiable. The term "negotiable" is used to describe a written instrument which is transferable by endorsement and delivery, or by delivery alone.

Promissory notes, like bills of exchange, circulate in the commercial world as representatives of money, and can be used to pay debts, make purchases, or make remittances of money to foreign countries. The Uniform Negotiable Instruments Act, which was approved in 1896 and has subsequently been enacted in every American jurisdiction, defines a negotiable promissory note as "an unconditional promise in writing made by one person to another, signed by the maker engaging to pay on demand, or at a fixed or determinable future time, a sum certain in money to order or to bearer". In the absence of a special statutory provision to the contrary, the mere acknowledgment of a debt is not generally considered to be a promissory note.

Origin

The precise origin of bonds in a form similar to the modern credit instrument is obscure. In medieval Europe a debt was often secured by an individual "giving his bond". As early as the 12th century, records of negotiable credit instruments are found, and on occasion recourse could be had to the courts to enforce the payment of such debts. These were still direct personal debts, however. By the 16th and 17th centuries, public loans to kings and princes were common, but the debt instruments lacked enforceability at law because the debtor was also usually the law.

In the 17th century, bonds essentially similar to the modern version appeared in England, the Netherlands, and France. In each instance they were governmental or crown bonds. In England the records show that bonds of Charles II were hawked among the London nobility. It was not until the public issue of bonds by William III in 1693, however, that true enforceability of the debt was achieved. By that time Parliament's power was sufficient to assure payment to the lender. These bonds of William III are widely considered to be England's first modern issue.

On the Continent, the Antwerp Bourse was a major financial market and center in the 16th century, and royal bonds, city bonds, and even private bonds (royally guaranteed) were regularly traded there. As early as 1537 they were declared by imperial order to be formally binding, like commercial bills. Interest, howler, was paid in disguised form, because of the tenacious ban on usury. Lyon and Paris do not show bond dealings in crown debt until the late 17th century.

The development of bond financing to borrow money stemmed initially from a need for funds on the part of kings and governments, a decreasing power to tax indefinitely, and a necessity therefore to broaden the base of financial resources available to the crown. Thus the funded public debt and bond financing in the modern sense developed from the same historical and financial circumstances.

Comments

    0 of 8192 characters used
    Post Comment

    • AllSuretyBonds profile image

      AllSuretyBonds 7 years ago

      Great Hub. Very useful and informative information.

    • AllSuretyBonds profile image

      AllSuretyBonds 7 years ago

      Great Hub. Very informative.

      Security is one of the major benefits for investing in a bond. If a company is liquidated, bondholders usually have priority over stockholders in a company’s capital structure and are more likely to receive payment. The percentage of this payment compared with the original investment is called the “recovery rate.” Even the holder of a low-rated bond is entitled to a share of a failing company’s assets ahead of preferred or common stockholders.

    working

    This website uses cookies

    As a user in the EEA, your approval is needed on a few things. To provide a better website experience, hubpages.com uses cookies (and other similar technologies) and may collect, process, and share personal data. Please choose which areas of our service you consent to our doing so.

    For more information on managing or withdrawing consents and how we handle data, visit our Privacy Policy at: "https://hubpages.com/privacy-policy#gdpr"

    Show Details
    Necessary
    HubPages Device IDThis is used to identify particular browsers or devices when the access the service, and is used for security reasons.
    LoginThis is necessary to sign in to the HubPages Service.
    Google RecaptchaThis is used to prevent bots and spam. (Privacy Policy)
    AkismetThis is used to detect comment spam. (Privacy Policy)
    HubPages Google AnalyticsThis is used to provide data on traffic to our website, all personally identifyable data is anonymized. (Privacy Policy)
    HubPages Traffic PixelThis is used to collect data on traffic to articles and other pages on our site. Unless you are signed in to a HubPages account, all personally identifiable information is anonymized.
    Amazon Web ServicesThis is a cloud services platform that we used to host our service. (Privacy Policy)
    CloudflareThis is a cloud CDN service that we use to efficiently deliver files required for our service to operate such as javascript, cascading style sheets, images, and videos. (Privacy Policy)
    Google Hosted LibrariesJavascript software libraries such as jQuery are loaded at endpoints on the googleapis.com or gstatic.com domains, for performance and efficiency reasons. (Privacy Policy)
    Features
    Google Custom SearchThis is feature allows you to search the site. (Privacy Policy)
    Google MapsSome articles have Google Maps embedded in them. (Privacy Policy)
    Google ChartsThis is used to display charts and graphs on articles and the author center. (Privacy Policy)
    Google AdSense Host APIThis service allows you to sign up for or associate a Google AdSense account with HubPages, so that you can earn money from ads on your articles. No data is shared unless you engage with this feature. (Privacy Policy)
    Google YouTubeSome articles have YouTube videos embedded in them. (Privacy Policy)
    VimeoSome articles have Vimeo videos embedded in them. (Privacy Policy)
    PaypalThis is used for a registered author who enrolls in the HubPages Earnings program and requests to be paid via PayPal. No data is shared with Paypal unless you engage with this feature. (Privacy Policy)
    Facebook LoginYou can use this to streamline signing up for, or signing in to your Hubpages account. No data is shared with Facebook unless you engage with this feature. (Privacy Policy)
    MavenThis supports the Maven widget and search functionality. (Privacy Policy)
    Marketing
    Google AdSenseThis is an ad network. (Privacy Policy)
    Google DoubleClickGoogle provides ad serving technology and runs an ad network. (Privacy Policy)
    Index ExchangeThis is an ad network. (Privacy Policy)
    SovrnThis is an ad network. (Privacy Policy)
    Facebook AdsThis is an ad network. (Privacy Policy)
    Amazon Unified Ad MarketplaceThis is an ad network. (Privacy Policy)
    AppNexusThis is an ad network. (Privacy Policy)
    OpenxThis is an ad network. (Privacy Policy)
    Rubicon ProjectThis is an ad network. (Privacy Policy)
    TripleLiftThis is an ad network. (Privacy Policy)
    Say MediaWe partner with Say Media to deliver ad campaigns on our sites. (Privacy Policy)
    Remarketing PixelsWe may use remarketing pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to advertise the HubPages Service to people that have visited our sites.
    Conversion Tracking PixelsWe may use conversion tracking pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to identify when an advertisement has successfully resulted in the desired action, such as signing up for the HubPages Service or publishing an article on the HubPages Service.
    Statistics
    Author Google AnalyticsThis is used to provide traffic data and reports to the authors of articles on the HubPages Service. (Privacy Policy)
    ComscoreComScore is a media measurement and analytics company providing marketing data and analytics to enterprises, media and advertising agencies, and publishers. Non-consent will result in ComScore only processing obfuscated personal data. (Privacy Policy)
    Amazon Tracking PixelSome articles display amazon products as part of the Amazon Affiliate program, this pixel provides traffic statistics for those products (Privacy Policy)