What is a personal surety bond?
Also known as business bonds and commercial surety bonds, commercial bonds are agreements that protect businesses. They’re generally required by state laws for various industries, and guarantee some aspect of a principal’s occupation. Learn more below about which type of business bond is right for you.
A bond is a debt obligation, like an Iou. Investors who
buy corporate bonds are lending money to the company
issuing the bond. In return, the company makes a legal
commitment to pay interest on the principal and, in
most cases, to return the principal when the bond comes
due, or matures.
to understand bonds, it is helpful to compare them with
stocks. When you buy a share of common stock, you own
equity in the company and will receive any dividends
declared and paid by the company. When you buy a
corporate bond, you do not own equity in the company.
You will receive only the interest and principal on the
bond, no matter how profitable the company becomes or
how high its stock price climbs.
But if the company runs
into financial difficulties, it still has a legal obligation to
make timely payments of interest and principal. the
company has no similar obligation to pay dividends to
shareholders. In a bankruptcy, bond investors have priority
over shareholders in claims on the company’s assets.
like all investments, bonds carry risks. one key risk to a
bondholder is that the company may fail to make timely
payments of interest or principal. If that happens, the
company will default on its bonds. this “default risk”
makes the creditworthiness of the company—that is, its
ability to pay its debt obligations on time—an important
concern to bondholders.
What are the basic types of corporate
bonds?
Corporate bonds make up one of the largest components
of the u.s. bond market, which is considered the largest
securities market in the world. other components include
u.s. treasury bonds, other u.s. government bonds, and
municipal bonds.
Companies use the proceeds from bond sales for a wide
variety of purposes, including buying new equipment,
investing in research and development, buying back their
own stock, paying shareholder dividends, refinancing
debt, and financing mergers and acquisitions.
Bonds can be classified according to their maturity, which
is the date when the company has to pay back the
principal to investors. Maturities can be short term (less
than three years), medium term (four to 10 years), or long
term (more than 10 years). longer-term bonds usually
offer higher interest rates, but may entail additional risks.