BONDS

When a business or the government needs to raise a large amount of money for, say, corporate expansion or to build a new sports facility, it sells bonds to the public. A bond, then, is a financial instrument that represents a binding promise to pay the buyer of the bond the face or "par" value of the bond plus a definite rate of interest (known as the "coupon" rate) within a specific period of time (normally ten to thirty years). When a business or government issues a bond it is asking the public to lend it money, and in return for that loan it promises to pay bond holders interest, usually twice a year until the bond is paid back (known as reaching "maturity"). While a stock represents a piece of actual ownership in the company that can grow or shrink as much as the company underlying it does, a bond is an obligation to pay back a finite loan that the bondholder made to the company when he or she bought the bond. Bonds are a cheaper way to raise money because they are tax deductible.

Bonds have always played a critical role in the U.S economy. Because it issued war bonds, for example, the U.S. government was able to retire its debt established during the American Revolution (1775–1783) by 1835. Local governments began issuing municipal bonds in the nineteenth century as U.S. communities built canals and public highways. By the end of the American Civil War (1861–1865), 75 percent of the U.S. government's war debt was in the form of war bonds and similar instruments. A bull market in bonds lasted from the end of the Civil War until World War I (1914–1918), during which the government sold more than $21 billion in "Liberty loans" to U.S. citizens. This was the first time many Americans had ever owned paper securities (bonds or stocks), and it paved the way for a new group of middle-class investors who participated in the bull market of the 1920s. After the Japanese attacked Pearl Harbor in 1941, the U.S. Treasury quickly sold $2.5 billion in war bonds to U.S. citizens, and by 1944 alone it was selling $53 billion annually in war bonds. Both the government and corporate bond markets continued to grow and diversify after World War II (1939–1945), and today investors can own dozens of different bonds through bond mutual funds.