Bonds, Definition

A bond is a debt security, similar to an IOU. When you purchase a bond, you are lending money to a government, municipality, corporation, federal agency, or other entity known as the issuer. In return for the loan, the issuer promises to pay you a specified rate of interest during the life of the bond and to repay the face value of the bond (the principal) when it "matures," or comes due. In contrast to bondholders who have IOUs from the issuer, shareholders are owners of the company they purchase.

There are many different kinds of bonds, including: U.S. government securities, municipal bonds, corporate bonds, mortgage and asset-backed securities, federal agency securities, and foreign government bonds.