A bond, also referred to as bonded debt, is a financial instrument that generates interest and appreciates as time goes by. It is an investment instrument that can have a fixed interest rate or a variable interest rate.
The entity that creates these bonds is the issuer. Issuers of bonds may, for instance, be a state, a municipality, a government or a company. This issuer creates bonds and sells these instruments to investors who then own the bonds. Owners of bonds become creditors of the issuer under the conditions determined beforehand. Afterward, the issuer entity finances different investment projects using the money obtained from the bond holders. The value of the bond itself then increases thanks to the investment returns obtained by the issuer. One may trade bonds at a stock market – this also includes the state stock markets. Their issuing is subject to regulatory rules according to each country and its particular legislation.
Issuance of bonds
The commonly cited objective of bonds issuers is to provide a better alternative to bank loans for institutions that require investment. The issuer determines the payment due date and interest rate for their bonds. The price of the bond and its appreciation depend on the reliability assessment of the issuer as well as the amount of issuing and demand for the particular bonds.
Governments and states are the main issuers of bonds. The value of a bond depends on the history of the issuer and the maturity of the bond. Bonds may be risky – in particular when the issuers are highly indebted. Such states often issue their bonds solely in order to pay back the previous debts and they are in a vicious circle. Every new loan is increasingly more expensive. Afterward, they are often created (at best) to increase inflation of their currencies and thus decrease appreciation to their creditors. At worst, such a country may go bankrupt forcing its creditors to restructure the debt and to change the installment conditions.
Greece is an example of the aforementioned situation since it officially did not go bankrupt but its bonds had to be withdrawn from the publically traded market and installments were prolonged for the creditors by dozens of years. In this case, there is no doubt that creditors will lose their appreciation because of past and future inflation. After all, this may be insufficient and creditors will have to deduct far more.
Find out more about bonds here: https://www.investopedia.com/terms/b/bond.asp
