Definition of Financial Bonds

Financial bonds are instruments of debt. They are issued by a corporation or body, such as the government, in order to generate cash. The issuing organization then promises to pay back the principal sum, plus interest, at a given point in the future. Many bonds also have yields, meaning they pay an additional sum each month or each quarter in profits to the purchaser.

Stocks vs. Bonds

Stocks are instruments of equity. When a purchaser buys a stock, that purchaser is actually taking a small stake in the company. Thus, the value of a stock goes up and down with the value of a company. A bond's value remains fairly constant during its lifetime. However, if the issuing organization changes the bonds it is issuing, the bond's value can go up and down.

Bond Value

If a company, for example, issues a bond one day for $100 and the same bond the next day for $70, then the purchaser will no longer be able to sell the bond for a profit. However, issuers usually change the terms of the bond if they change the price. For example, the interest rate can change. The comparison of a bond's price to its interest rate is called "duration."

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