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Bonds

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A bond is a financial instrument that is purchased by an investor (bondholder) and entitles the bondholder to receive payment of the principal and any interests associated with the bond (bond coupon interest), if applicable. Such payment is usually made on a specified date (bond maturity) and/or at specific intervals for interests payments. Unlike a stockholder, a bondholder does not receive any corporate ownership but rather an IOU from the bond issuer. Various type of bonds include government bonds (city, state, national), and corporate bonds. Credit quality (secured vs. unsecured) and duration are the key factors in setting the bond's interest rate. A secured bond is backed by collateral whereas an unsecured bond is only backed by the credit of the issuer. Therefore, with the exception of Treasury bonds, unsecured bonds can be seen as a riskier type of bond. In the case of Treasury bonds, however, while they are unsecured bonds, the credit of the issuer (the Treasury) makes those type of bonds the safest unsecured bonds on the market. Bond maturity is another feature of any bond and it can be as low as 90 days (90-day Treasury bill) or as high as 30 years (30-year Treasury bonds). Certain bonds issued by governmental entities are tax-exempt which makes their interest payment tax deductible.



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