A company or even a government entity sells a bond [1] for a certain amount of money. At a specified date of maturity, the selling party is to pay back the initial investor the price of the bond plus interest. Not all bonds [1] pay interest, but all bonds must pay back the principal.
Buying a bond does not give the buyer an interest or stock in the company, but in the event of a company collapse, the person holding a bond is considered a creditor and will be among the first to be paid off if the company still has assets [2] to sell. A person holding a stock in the company can only reclaim the market value of the stock.
Bonds can be issued for maturity from a 1-year to a 30-year period.
When a corporation [3] sells a bond, it is known as a corporate bond [4]. A corporate bond usually pays a higher interest rate [5], also known as “yield,” than a regular bond.
If you are buying a bond from a start-up company that hasn’t shown a particular potential for generating substantial profits, you are taking a high risk. These bonds, also known as “junk bonds,” offer a higher yield [6] than a bond purchased from a company such as Chase Manhattan, which is known as a “Blue Chip” company. A blue chip bond would produce a lower yield, but would also be at a lower risk of defaulting.
Since bond holders must be paid off before stock holders, bonds are a less risky investment.