Can someone explain to me what a bond is in Laymen's Terms?

Question

I want to invest some money and I was reading about bonds. How do they work? Can you explain all the words associated with bonds and investing such as interest, return rate, debt security, and secure and unsecured bonds. I know its a lot but I want to be informed. Please put it very simply. A website along with your answer will be very helpful.

Answer 1

http://finance.yahoo.com/bonds

Bonds are basically investor loans to institutions.  Various bonds are structured differently.  They may Corp. bonds, state Bonds, Fed Bonds .  Check the link above

Answer 2

A bond, simply put, is an IOU. This differs from a stock, which, if you buy it, means you actually OWN a piece of the company that issued the stock.

Bonds can come from corporations, but they are probably most well known in association with the government. Government entities like towns, counties, states, and the federal government, obviously can't sell you stocks, because we can't "own" the government. So, they have two ways to generate revenue with which to accomplish things. They can levy taxes, or they can "float" a bond. (Float just means "offer for sale") It's called "float" because if you offer it and no one buys it, it "sinks."

In any case then, in the simplest of terms, a bond is nothing more than a loan. Let's say your town wants to build a new city hall. They don't have enough money to do it, and the amount they take in annually in taxes isn't enough to pay for it, so they need to borrow the money in one big amount. They announce the project, announce how much money it will cost to build it, then they float a bond issue equal to the amount of money they need to borrow. They also announce the interest rate they are willing to pay to borrow this money, and most of the time, because it's the government, they can let you collect those interest payments without having to pay income tax on them. You and I and other investors then get to decide if we want to lend the town money, and if so, we "buy" those bonds. Clearly the term "buy" means something different than a stock, because you are "buying" a piece of the debt the town owes, you're not buying a piece of the town.

There's lots more to learn, but that's a start, I think.