Bonds

A company requires money so they can undertake projects. They pay their investors dividends from the revenue earned on their projects. One way of raising the capital for operations and other company procedures is via bonds. When a compay choose to borrow money from a bank, they take a loan which they repay through periodic interest payments. On a similar note, when a company opts to borrow funds from a variety of investors, this is known as a bond, which is also paid off through timely interest payments. Take the following example as an explanation of how bonds work.

Imagine that your goal is to start a project that will begin to earn money in two year’s time. To undertake this project, you will require some initial amount to get you started. Suppose you acquired funds in the form of a loan form a friend and write down the recepit of the loan stating that you owe them Rs. 1 lakh which you will repay in five years with an interest rate of 5 % per annum. Suppose that your friend now holds this recepit, it means that they have just purchased a bond by lending out money to your company. Since you have promised to pay the principal amount at 5 % interest, you do so and finally extinguish your princiapl repayment by the time the fifth year comes to a close.