- A bond has both an issuer and a holder. The issuer of the bond sells it to investors. Governments issue bonds to affect the economy and pay off expenses. Businesses issue bonds to raise money for various projects. The investor who buys the bond from the issuer becomes the bondholder. Both individuals and organizations can be bondholders.
- Investors become bondholders because of the interest payments they receive from the issuers of the bonds. A bond functions very much like a loan. The bondholder lends money to a business or government. The issuer periodically makes interest payments to the investor, usually twice a year, at a fixed interest rate. After a certain time, usually several years, the bond reaches maturity and the issuer pays the bondholder back his original investment.
- For many types of bonds, the bondholder has a "put" option. This option gives the bondholder the ability to sell the bond back to the company instead of trading it on the market or waiting until it reaches maturity. Bondholders can typically only exercise a put option within a certain time frame. Bondholders usually only do this when the issuer is suspected of fraud or when the company is failing.
- Bondholders do not own stock in a company. One of the reasons businesses issue bonds rather than issue more shares of stock is that they do not want to dilute ownership in the company. Stocks are equity, and stock owners have a sliver of ownership in the business. Bondholders only make loans to businesses and have no rights to influence company decisions.
- Bondholders have safer investments than stockholders. When a company fails, the remaining assets of the business are used to pay off bondholders first, then stockholders. This is because the company actually owes bondholders money, whereas stockholders are under a different type of contract. Some bonds, such as those from governments, are extremely safe, and bondholders who hold these securities have much greater assurance of payment than stockholders.
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