Both bonds and stocks are considered securities in the investment world. A bond is considered a debt security, which means that the issuer of the bond subsequently owes the holder of the bond a specific debt. In addition, if the terms of the bond indicate this, the issuer will be required to include interest (this is called the “coupon”). The issuer may also be obliged to repay the principal of the bond at a future date (this is called “maturity”). Therefore, bonds are considered contracts to repay borrowed money with interest, and with payments scheduled at predetermined intervals.
It is not difficult to understand the concept of a bond if it is considered like a loan. The bond has a borrower, just like a loan, which is the bond issuer. Similarly, the lender for a bond is known as the holder. Finally, the interest that would accrue in a normal loan situation is called the coupon for a bond. Companies will utilize bonds in order to attract funds that they can use to pay for long-term projects or investments. When the government offers a bond, however, they do so in order to pay for current expenses. The repayment of bonds is scheduled at predetermined intervals over a period of time.
There are a few significant differences between bonds and stocks. Stocks provide an ownership stake in a company. Bonds, on the other hand, provide a creditor stake in a company. Another difference is that bonds usually have a specific period of maturity, but stocks do not. This means that after a set period of time the bond is completed.
For more information, check out what bond funds are.