A bond is a type of debt security (like company stock) in which the issuer promises to pay back interest on a debt granted by the holder of the bond. Simply put, if you purchase a bond, the company or government which sold you the bond owes you the purchase price plus interest over a set amount of time. This makes bonds similar to loans, although there are also a number of differences.
Bonds are issued by a number of lending institutions, companies, and governments, and come in a number of types, based on how long they take to mature (that is, the amount of time before the final payment date). The three types include:
- Short-term: bonds which mature in one year or under
- Medium-term: bonds which mature within one and ten years
- Long-term: bonds which mature in over ten years
Bonds can further be broken down into several sub-categories based on how the interest is compounded. Common types of bonds include:
- Fixed-rate bonds, which maintain a fixed interest rate
- Floating-rate notes, the interest rates of which change every several months
- Zero-coupon bonds, which pay no regular interest but which instead pay at maturity
Because bonds can be complicated, it may be beneficial to consult with an experienced financial adviser before acquiring one.
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