In finance and economics, a bond or debenture is a debt instrument that obligates the issuer to pay to the bondholder the principal (the original amount of the loan) plus interest. Thus, a bond is essentially an I.O.U. (I owe you contract) issued by a private or governmental corporation. The corporation "borrows" the face amount of the bond from its buyer, pays interest on that debt while it is outstanding, and then "redeems" the bond by paying back the debt. A mortgage is a bond secured by real estate.
Bonds are securities but differ from shares of stock in that stock is an ownership interest (termed "equity"), but bonds are merely "debt": Therefore a shareholder is an owner, but a bond-holder is merely a creditor.
Each country sets its own rules for issuing and redeeming short and long-term debt and stock. In the U.S. (for example):
- Bonds are long-term loans secured by property rather than short-term loans secured merely by the debtor's promise to pay.
- Interest paid to bondholders receives preferential tax treatment compared to dividends paid to shareholders.
- In bankruptcy, bondholders are paid before short term creditors (including workers who are owed wages) and all creditors must be paid in full before owners receive anything.
