The bond is one of the classic financial instruments of the economy, which serves to supplement and make more efficient use of available income by temporarily reallocating free cash.
In terms of its economic content
On the one hand, it is credit and, on the other, savings. When the bond is sold, the issuer, ie the debtor, usually turns to buyers, the general public – a wide range of individuals and organizations – creditors – to meet their longer-term (maturity) cash requirements. The issue of bonds thus enables the pooling of smaller, ineffective capital, into production and the grouping of larger but less efficient capital into a more efficient area.
By selling the bond, the issuer generally undertakes a long-term financial obligation to finance its investment objectives and, as a result, obtains liquid funds. This obligation is to pay or pay to the respective holder of the bond the amount (nominal value), the specified interest or other charges, as well as any services undertaken, within the stated time and manner.
The holder of the bond does not have any influence, real or formal co-ownership in the business of the issuing institution.
A loan is a legal form of a bond
In this loan transaction, the issuer is the debtor and the buyer is the lender. The loan is valid until maturity and the issuer must repay the nominal value of the bond by this date at the latest. As we already know, the bond belongs to the group of interest-bearing securities, so the price of the asset is based on predetermined conditions.
The owner of the bond, as the lender, has no ownership rights at all. It follows from this that the issue of bonds as a long-term obligation for the company is an alternative to investment loans. Here are a few thoughts on comparing your money from bond issuance to bank credit!
Throughout the comparison, we will assume that the following two assumptions are met, that is, that the issuer (such as an entity) could obtain a bank loan and that there is a potential demand for the bonds, so that the issue may be successful.