In financial market lingo, a bond is a long-term loan made by an individual to an institution, which agrees to repay the full sum of the loan at the date of maturity, plus a fixed or floating rate of interest on the money borrowed at established intervals along the way. In other words, it is basically an IOU that promises repayment of your money plus interest over a set period of time.
Though often linked with stocks in the public's mind, bonds are very different. For one thing, the bond market is considerably larger than the stock market in terns of dollars invested. For another, when an individual buys stock, he or she becomes in effect a part owner in the company, sharing in the profits through dividends and retained earnings. Profits, of course, are not assured. They are completely dependent upon how the company's fortunes rise or fall. But when you buy bonds, you become a creditor, owning debt, and you profit from the regular interest payments you receive on the loan until it is paid off.
Although the volume of bonds available to investors is enormous, there are basically only three major types of bonds in the United States: treasuries, corporate's, and municipals. Treasuries are issued by the U.S. government, corporate's by American companies, and municipals by state and local governments and their agencies. Each issues bonds to raise cash for a wide range of purposes, everything from funding new or existing projects to modernizing and expanding to just plain staying afloat.
Corporations can sell stock to raise capital as well, but often prefer borrowing with bonds - and getting a tax break on the interest paid out - to allowing more fingers into the profit pot by issuing additional stock.
The U.S. Treasury is the largest issuer of such debt in the world, most of it to cover the large budget deficits.
