What is a bond?

A bond is a loan in the form of security within financial markets where an authorised issuer owes a debt to the holder of the bond, which must be paid back. The original amount is called the principal and any interest which is paid is known as the coupon. The date when this repayment takes place is known as the maturity date.

Typically, companies issue bonds to raise long-term financing from external funds without having to extend their shareholder base. One should note that certificates of deposit (CDs) and commercial paper (CP) are categorised as money market instruments and not as bonds.

Although bonds and equities are both kinds of securities instrument, the primary differences are:

·         Equity holders own an equitable stake in the company; bond holders are lenders to the company

·         Bonds usually have a well-defined end-date (maturity) after which the bond is redeemed; equities have no such end-date