Word of the Day – Bonds

Bonds — securities that aren’t always secure

Definition:  IOUs issued by a company or a government

Discussion: A bond is a formal contract to repay borrowed money with interest at fixed intervals for a finite period of time. That contract can be contravened under a process we call bankruptcy.

When bankruptcies happen, bondholders are supposed to be more assured of repayment than holders of a kind of securities called “stock”. However, that isn’t always the case. Washington Mutual bondholders, like its stockholders, received virtually nothing when the bank went bankrupt.

The thing about bonds is that they are fixed debt securities. This means that they pay a fixed rate of interest over a certain amount of time. Interest on bonds, like dividends paid on stocks, is taxed at ordinary income rates, rather than at the lower tax rates for capital gains.

However, if the holder sells a corporate bond before its “maturity date,” the seller can incur capital gains  or capital losses. Capital gains taxes are levied on money made when buying and selling securities, (i.e., stocks or bonds).

Related terms: capital gains taxes; stocks

Copyright © 2011 Nancy K. Humphreys


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