What Is a Bond?

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By Robert Brokamp

Ever borrow money from someone? Sure you have. It happens all the time. Forget your lunch money? Wanna buy a soda? Need cab fare? People borrow money every day for all kinds of reasons.

Much like people, large organizations such as corporations, the federal government, and state and local governments all need to borrow money occasionally. Unlike you and me, it is awfully difficult for these organizations to get as much money as they need just with the promise to repay it the next day. Instead, they have to agree not only to pay back the amount they borrowed, but also to pay a little extra in the form of a fee (interest) for the privilege of borrowing the money.

The first time an ancient monarch borrowed a large sum of money from a rich neighbor, agreed to repay the money with interest, and wrote this up on a piece of papyrus, the bond was born. Deficit-laden governments across the world use bonds as a way to finance their operations. Cash-strapped companies sell debt in order to get the money they need to expand.

Bonds are a form of indebtedness that is sold to the public in set increments, normally in the neighborhood of $1,000. In return for loaning the debtor the money, the lender gets a piece of paper that stipulates how much was lent, the agreed-upon interest rate, how often interest will be paid, and the term of the loan.

If you're interested in investing in bonds, which type should you choose? The pros and cons of individual bonds depend on the lender. Move along, Fool, and see what we mean.

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