Bonds

A debt obligation with a long-term maturity, usually issued by firms and governments.

If you wish to invest in a business but are unable to bring yourself to take the risk associated with shares, a good alternative is to purchase a corporate bond. A bond is a long-term contract in which bondholders lend money to a company. In return the company (usually) promises to pay the bond owners a series of interest payments known as coupons, until the bond matures. At maturity the bondholder receives a specified principal sum called the par, face or nominal value of the bond. This is usually US$100 in the US. The time to maturity is generally between 7 and 30 years. Bonds are a form of debt finance and are not ownership capital. The holders are not entitled to vote at the company meetings (AGMs or EGMs). A lower rate of return is offered on bonds than on shares because bond investors have a number of safeguards that equity investors do not. The interest on bonds is paid out before ordinary share dividends are paid, so there is a greater certainty of receiving a return than there is for equity holders. Also, if the firm goes into liquidation, the bondholders are paid back before shareholders receive anything. Furthermore, bondholders often insist on taking collateral for the loan, and may restrict managerial action so they don't make the firm too risky. Offsetting these plus points for bonds is the fact that lenders do not, generally; share in the value created by an extraordinarily successful business. They receive only the contracted amount of interest.

Bonds are often traded in the secondary market of the stock exchange. So despite companies obtaining long-term finance for years ahead, the investor who provides that money can sell the bond to another investor to liquidate his holding.