UK Accounting Glossary
The name sometimes given to loan finance (more commonly in the USA).
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.
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.
A government bond is a debt security issued by a government to support government spending. Government bonds can pay periodic interest payments called coupon payments. Government bonds are considered low-risk investments since the government backs them.
Bond financing is typically cheaper than loan financing because the investors’ risk is mitigated by market liquidity. To put it another way, it’s easier to sell a bond than it is to sell a loan, thus an investor will accept a slightly lower yield in exchange for this flexibility.
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This glossary post was last updated: 23rd December 2018.