Bonding With Bonds

by David Jenyns on May 15, 2009

Bonds are classified in a number of ways. By purpose of issue we may have bridge, highway, terminal, and equipment bonds; by origin we may have railroad, utility, government, municipal, and industrial bonds; by type, referring to the bond itself and its various investment attributes, we may have coupon, registered, callable, convertible, and sinking-fund bonds.

The most common denomination in which bonds are issued is that of $1000, although occasionally $500 bonds are also offered. A bond is issued for a fixed period of time, commonly called the term, such as 20 years. It carries a fixed rate of accrual, such as 4 percent.

This stated rate and term appear as part of the contract, but the rate is essentially not the effective rate, which depends upon the price at which the bond is bought. Bonds are a safe investment in that, when purchased from a government, the government guarantees that the bondholder’s money will be paid back with accrual.

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