Financial Bond

⸺ by Charles Iliya Krempeaux

A Financial Bond is a specific type of agreement between an issuer (also called a borrower and debtor) and a holder (also called a creditor and lender ). The issuer borrows money from the holder. The amount of money borrowed is called the principal. The issuer agrees to pay back the principal to the holder after a pre-agreed length of time. The issuer also agrees to pay the holder extra money on some pre-agreed schedule.

When the context is obvious, the phrase financial bond is often shortened to just bond.

Example

Let's use an example to try to make this clearer.

Let's say you want to borrow $100,000. And you will pay back the $100,000 1 year after you borrow it. And you don't have any friends or family who will lend you the money — so you have to borrow it from a stranger. Why would a stranger lend you $100,000‽ — well, because you will pay the lender (who is a stranger) more than just the $100,000 they lent you. Let's say that, after the 1 year, you agree to pay the lender back the $100,000 they lent you, plus an extra $7,000.

That $100,000 that the lender lends the borrower is called the principal.

That extra $7,000 that the borrower pays the lender to incentivize the lender to lend them the money is called the yield.

The 1 year length of time is called the maturity date.

That whole agreement, that includes the maturity date, the pricipal amount, and the yield amount and schedule, is called a financial bond.

Features

So, the 3 important feature of any bond is: