Define: Bond

UK Accounting Glossary

Definition: Bond

Quick Summary of Bond

The name sometimes given to loan finance (more commonly in the USA).

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.


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.


Bond FAQ's

What are government bonds in economics?

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.

Why are bonds cheaper than loans?

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.

Cite Term

To help you cite our definitions in your bibliography, here is the proper citation layout for the three major formatting styles, with all of the relevant information filled in.

Page URL
Modern Language Association (MLA):
Bond. Payroll & Accounting Heaven Ltd. January 18, 2020
Chicago Manual of Style (CMS):
Bond. Payroll & Accounting Heaven Ltd. (accessed: January 18, 2020).
American Psychological Association (APA):
Bond. Retrieved January 18, 2020, from website:

Definition Sources

Definitions for Bond are sourced/syndicated from:

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

This glossary post was last updated: 23rd December 2018.