Businesses borrow funds to invest in research and innovation, expansion or diversification of their products and services. They may initially require funds to even carry out day-to-day operations. Part of their funds can be taken as a loan from the bank. For the remaining extra investment required, the organization issues bonds to buyers who are interested in investing. Hence, bond is in a way, a loan with a fixed rate of interest. Buyers ‘lend’ funds to the organization in the form of bonds. In return, the organization promises to pay back the ‘loan’ with interest. Depending upon on the terms and conditions of the bond, the extra interest money as well the duration and schedule of repayments would be determined. The rate of interest of a bond is known as the coupon. The value is higher for long-term investments. The interest payment is generally made every 6 months, but the buyers of the bond can also opt for monthly, quarterly and annual payments. When the bond matures, the original investment of the buyer would be repaid. Bonds can also be traded like stocks. When the bond is sold a lower price than what it was purchased for, it is called discount. If the selling price is higher, it is called premium.
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