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In finance, a bond is a debt security, in which
the authorized issuer owes the holders a debt and is obliged to repay the
principal and interest (the coupon) at a later date, termed maturity. Other
stipulations may also be attached to the bond issue, such as the obligation
for the issuer to provide certain information to the bond holder, or
limitations on the behavior of the issuer.
In case of debt securities issued by U.S. Treasury, those with life of ten
years or more are called "bonds", those with life between one year and ten
years are "notes" and those with life of less than a year are "bills".
A bond is simply a loan, but in the form of a security, although terminology
used is rather different. The issuer is equivalent to the borrower, the bond
holder to the lender, and the coupon to the interest. Bonds enable the
issuer to finance long-term investments with external funds. Note that
certificates of deposit (CDs) or commercial paper are considered to be money
market instruments and not bonds.
In some nations, both terms bonds and notes are used irrespective of the
maturity. Market participants normally use the terms bonds for large issues
offered to a wide public and notes for smaller issues originally sold to a
limited number of investors. There are no clear demarcations. There are also
"bills" which usually denote fixed income securities with terms of three
years or less, from the issue date, to maturity. Bonds have the highest
risk, notes are the second highest risk, and bills have the least risk. This
is due to a statistical measure called duration, where lower durations mean
less risk and are associated with shorter term obligations.
Bonds and stocks are both securities, but the major difference between the
two is that stock-holders are the owners of the company (i.e., they have an
equity stake), whereas bond-holders are lenders to the issuing company.
Another difference is that bonds usually have a defined term, or maturity,
after which the bond is redeemed, whereas stocks may be outstanding
indefinitely. An exception is a consol bond, which is a perpetuity (i.e.,
bond with no maturity).
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