A surety bond is not an insurance policy and, if cashed by the obligee, its amount is recovered by the surety from the obligor.
The issuer (company, government. municipality) pledges to pay the loan principal (par value of the bond) to the bondholder on a fixed date (maturity date) as well as a fixed rate of interest for the life of the bond.
Alternatively, some bonds are sold at a price lower than their par value in lieu of the periodic interest. On maturity the full par value is paid to the bondholder. Bonds are issued in multiples of $1,000, usually for periods of five to twenty years, but some government bonds are issued for only 90 days. Most bonds are negotiable. and are freely traded over stock exchanges. Their market price depends mainly on the rating awarded by bond rating agencies on the basis of issuer’s reputation and financial strength.
Investment in bonds offers two advantages: (1) known amount of interest income and, unlike other securities. (2) considerable pressure on the company to pay because the penalties for default are drastic. The major disadvantage is that the amount of income is fixed and may be eroded by inflation. Companies use bonds to finance acquisitions or capital investments. Governments use bonds to keep their election promises, fund long-term capital projects, or to raise money for special situations, such as natural calamities or war.
- The woman was looking for the bond that the man had signed, stating that she would be paid the agreed upon amount by the following day.
- When my grandmother bought me an investment bond for one dollar I bet she didn’t think it would be worth a thousand dollars thirty years later.
- Oliver had a history with the construction crew and trusted them completely, but the company CFO still insisted on a bank-issued bond to guarantee project completion.