What is a Bond
A bond in its simplest form is a way for an organisation to borrow money, in the same way individuals need to borrow money to buy a house or a car.
Institutions, banks and even governments need to borrow money to fund their various activities.
A bond that is issued is essentially an IOU from the organisiation issuing it. In return for borrowing money in this way the organisation will pay interest or yield on the bond to the bond holder. The interest rates can be fixed as in the case of a fixed rate bond, or as with many growth bonds the interest paid could be linked to the performance of another entity such as the stock market.
Most bonds have a fixed terms (2 years, 3 years, 5 years etc..) Over this period the interest / yield will be paid. In the case of an income bond typically the bond holder will receive an interest payment every 6 months. With growth bonds this tends pay a final amount on top of the sum lent at the end of the fixed period.
In summary, investors purchasing a bond from an institution are making a loan of their money to that organisation. In return that organisation will pay interest or an agreed yield in addition to the repayment of the original capital lent.
