How Are Bonds Funded?

A bond is an asset form that is typically issued by a government entity, but also can be issued by privately held or publicly traded companies, banks, credit unions, public utilities, even publicly owned airports and harbors.  The bond is used to raise capital for the entity issuing it.  The purchaser of the bond, who will then become the bond holder or owner, pays the money required to own the bond.  When the bond matures, the bond issuer cashes in the bond, making the payment to the bond holder specified by the bond amount.  A typical bond, a coupon bond, is sold at what is called discount.  The discount amount is what the bond is assesed to be worth at a given state in its maturity.  The maturity amount is what they will pay back.  The difference between the two is the amount earned by the bond purchaser in the form of interest.  A bond functions very similarly to a loan taken by a consumer from a bank.  There is a set time period, amount to borrow, and interest paid.  The only difference is that in a bond the purchaser is the one who makes the money, not the bank or credit union.

The Money Behind The Bond

Based on the information provided above it is easy to see who funds bonds: the purchaser does.  In most cases this is the public; meaning the private individual who buys the bond with their own money.  The money behind the bond is in itself the issuer.  The issuer does not have to have the money available to pay back the maturity amount on the bond when it is purchased.  The money is being loaned in a sense, based on the promise that the issuer will have the money they are obligated to pay on the bond at a later date.  The money is secured based on the assets of the company issuing the bond or in the case of government bonds on the ability of the government to reimburse the capital through taxes and other government income.

Bond Funds

Another important source of income for bond issuers and also a source of investing strategy for investors are bond funds.  Bond funds are similar to mutual funds in that they consist of a group of investors making their bulk investments together.  As the bond fund increases in worth, it pays out its dividends to its holders.  An important note on bond funds is that they allow an investor to partake in the security of investing in bonds, with the advantage of having sooner and more frequent payouts than traditional bonds.

Related posts:

1. What Is Bond Maturity?
2. What Are Zero Coupon Bonds?
3. What are Government Bonds?
4. What Is The Bond Rate?
5. What Is A Treasury Bond?