Bond

Business, Legal & Accounting Glossary

Definition: Bond


Quick Summary of Bond


The name sometimes given to loan finance (more commonly in the USA). A certificate of debt issued by a company or the government. Bonds generally pay a specific rate of interest and pay back the original investment after a specified period of time.



What is the dictionary definition of Bond?

Dictionary Definition


  1. legal Evidence of long-term debt, by which the bond issuer (the borrower) is obliged to pay interest when due, and repay the principal at maturity, as specified on the face of the bond certificate. The rights of the holder are specified in the bond indenture, which contains the legal terms and conditions under which the bond was issued. Bonds are available in two forms: registered bonds, and bearer bonds.
  2. finance A documentary obligation to pay a sum or to perform a contract; a debenture.
  3. A physical connection which binds, a band; often plural.

In finance, a bond is an instrument of indebtedness of the bond issuer to the holders.

The bond acts is a debt security, under which the issuer owes the holders a debt and (dependant upon the terms of the bond) is obliged to pay them interest (the coupon) or to repay the principal at a later date, termed the maturity date.

A bond is simply an IOU. It is an agreement under which a sum is repaid to an investor after an agreed period of time.

A bond can be issued by anyone but is usually issued by governments (see gilts) or public companies to repay money borrowed.

These loans normally repay a fixed rate of interest over a specified time and also repay the original sum at par in full after an agreed period – when the bond matures.


Full Definition of Bond


In finance and economics, a bond or debenture is a debt instrument that obligates the issuer to pay to the bondholder the principal (the original amount of the loan) plus interest.

Thus, a bond is essentially an I.O.U. (I owe you contract) issued by a private or governmental corporation.

The corporation “borrows” the face amount of the bond from its buyer, pays interest on that debt while it is outstanding, and then “redeems” the bond by paying back the debt.

A mortgage is a bond secured by real estate.

  1. A written and signed promise, to pay a certain sum of money on a certain date, or on fulfilment of a specified condition. All documented contracts and loan agreements are bonds.
  2. Construction: A three-party contract (variously called bid bond, performance bond, or surety bond) in which one party (the surety, usually a bank or insurance company) gives a guaranty to a contractor’s customer (obligee) that the contractor (obligor) will fulfil all the conditions of the contract entered into with the obligee. If the obligor fails to perform according to the terms of the contract, the surety pays a sum (agreed upon in the contract and called liquidated damages) to the customer as compensation.
    A surety bond is not an insurance policy and, if cashed by the obligee, its amount is recovered by the surety from the obligor.
  3. Law:
    1. An appeal bond deposited by a losing party to stay the execution of a lower court’s judgment until the party’s appeal against it is decided by a higher court.
    2. A bail bond deposited by an accused as a guaranty of his or her appearance in the court when called.
    3. A judicial bond deposited by a litigant to indemnify the opposing judicial or governmental body from any loss arising due to the legal proceeding.
  4. Securities: A debt instrument that certifies a contract between the borrower (bond issuer) and the lender (bondholder) as spelt out in the bond indenture. The issuer (company, government, municipality) pledges to pay the loan principal (par value of the bond) to the bondholder on a fixed date (maturity date) as well as a fixed rate of interest for the life of the bond.
    Alternatively, some bonds are sold at a price lower than their par value in lieu of the periodic interest.
    On maturity, the full par value is paid to the bondholder. Bonds are issued in multiples of $1,000, usually for periods of five to twenty years, but some government bonds are issued for only 90 days. Most bonds are negotiable and are freely traded over stock exchanges. Their market price depends mainly on the rating awarded by bond rating agencies on the basis of issuer’s reputation and financial strength. Investment in bonds offers two advantages:

    1. A known amount of interest income and, unlike other securities,
    2. Considerable pressure on the company to pay because the penalties for default are drastic. The major disadvantage is that the amount of income is fixed and may be eroded by inflation. Companies use bonds to finance acquisitions or capital investments. Governments use bonds to keep their election promises, fund long-term capital projects, or to raise money for special situations, such as natural calamities or war.
  5. Commerce: A bank guaranty posted by an importer for an immediate release of landed goods (with a total value not exceeding the amount of bank guaranty) without payment of customs duties and taxes. The bond allows a fixed period during which the importer must submit the required documents and pay the assessed duties and taxes. See also bonded goods.

A bond is a financial instrument that is purchased by an investor (bondholder) and entitles the bondholder to receive payment of the principal and any interests associated with the bond (bond coupon interest), if applicable. Such payment is usually made on a specified date (bond maturity) and/or at specific intervals for interests payments. Unlike a stockholder, a bondholder does not receive any corporate ownership but rather an IOU from the bond issuer. Various type of bonds include government bonds (city, state, national), and corporate bonds. Credit quality (secured vs. unsecured) and duration are the key factors in setting the bond’s interest rate. A secured bond is backed by collateral whereas an unsecured bond is only backed by the credit of the issuer. Therefore, with the exception of Treasury bonds, unsecured bonds can be seen as a riskier type of bond. In the case of Treasury bonds, however, while they are unsecured bonds, the credit of the issuer (the Treasury) makes those type of bonds the safest unsecured bonds on the market. Bond maturity is another feature of any bond and it can be as low as 90 days (90-day Treasury bill) or as high as 30 years (30-year Treasury bonds). Certain bonds issued by governmental entities are tax-exempt which makes their interest payment tax-deductible.


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Bond. PayrollHeaven.com. Retrieved July 09, 2020, from PayrollHeaven.com website: https://payrollheaven.com/define/bond/

Definition Sources


Definitions for Bond are sourced/syndicated and enhanced from:

  • A Dictionary of Economics (Oxford Quick Reference)
  • Oxford Dictionary Of Accounting
  • Oxford Dictionary Of Business & Management

This glossary post was last updated: 15th February, 2020 | 10 Views.