Bond Definition in Finance
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Information about Bonds
Most people have heard of bonds before, but what exactly ARE bonds? Bonding definition in finance consist of TWO main types. The type we specialize in, and the type associated with loans, which is discussed later in the article. At NFP Surety, we secure business by creating specialized contracts between three parties.
- You (The principal)
- Us (The insurance company)
- And the entity requiring the bond
These contracts are called surety bonds, or simply… bonds.
What they guarantee is reliant on the type of bond and the language within the bond. It is tremendously important to understand what your bond is promising. There are literally thousands of various forms for numerous types, which are required all over the nation, by various obligees. Obligees are the entity requiring the surety.
Whatever surety bond you need, we can service all your bonding needs. Our expert team of surety bond professionals have seen it all, and know what it takes to adequately protect your business. We’ve been in the Surety Bond industry since 1984! Call us for all your surety needs.
The Other Type of Bond in Finance
Bonding defined in the realm finance is a loan. Typically, a company or a government entity will sell bonds to raise money for new projects like a factory or a football stadium. At the end of the life of the bond, whoever holds it can redeem whatever the amount the bond says the owner of it is due. Also, payments are made at annual or semi-annual intervals at the said interest rate. The reason many invest in bonds is because they are low risk in comparison to stocks.
Before we continue further, here are some important vocabulary terms that are often used when talking about bonds.
Coupon rate – The value of the annual or semi-annual payments that are owed to the possessor of the bond. Some consider it the interest rate.
Par value – The value that is owed to the owner of the bond when the lifespan ends.
Maturity Date – This is when the par value of the surety bond is owed to whoever owns it when the lifespan of the bond is complete. Bonds can be confusing, that is why WE makes the bonding processes pain free, by doing the shopping for you, and placing your business with top-notch companies.
The first are Corporate bonds. These are simply bonds that are given by companies. These carry the highest risk since a company is much more likely to default than a government. The next are Treasury. These are given by the federal government. They tend to have the smallest coupon rate, but also carry the lowest risk. Another reason they are called this is because the maturity date is over 10 years after the purchase of the surety. The last are Municipal. These are given at both the state level and the local level. Projects such as stadiums and parks can be funded by these entities issuing bonds. What makes these attractive investments are the tax incentive. Residents of the municipals often will not pay taxes on the coupons and on the par value.
The question many ask is, “How much should I pay for a bond?” To answer that, a comparison interest rate is needed. If the coupon rate is higher than what the interest rate is, expect to pay a premium to the par value. However, if the coupon rate is less than the current interest rate, paying less than the book value is the correct investment.
At NFP Surety, we have been the industry leader in surety solutions. We hope this article helps explain surety bonds. To learn more about some of the bonding companies we are associated with, go to Department of the Treasury’s Listing of Certified Companies.