Definition: According to Webster Dictionary, “a bond is an interest bearing certificate issued by a Government or business firm promising to pay the holder a specific sum at a specified date”.
A bond is thus:
- A formal contract to repay borrowed money with interest.
- Interest is payable at a fixed internal or on the maturity of the bond.
- A bond is a loan.
- The holder is a lender to the company.
- He gets a fixed rate of interest.
Features:
(i) Nature of finance:
- It is debt or loan finance.
- It provides long-term finance of 5 years, 10 years, 25 years, 50 years.
(ii) Status of investor:
- The bondholders are creditors.
- They are non-owners and hence, not entitled to participate in the general meetings.
- The bondholder has no right to vote.
(iii) Return on bonds:
- The bondholders get a fixed rate of interest.
- It is payable on maturity or at a regular interval.
- Interest is paid to the bondholder at a fixed rate.
(iv) Repayment:
- A bond is a formal contract to repay borrowed money.
- Bonds have a specific maturity date, on which the principal amount is repaid.
