A bond is a debt security issued by a company, public authority, supranational institution, or other entity as a promise to pay interest to the lender (bondholder) for a given period of time and reimburse the original principal at the term’s end. Bonds have financed government and private enterprise for centuries and are traditionally regarded as less risky than equity shares since bondholders in most countries have a legal claim to an issuer’s assets. Bond volatility is generally lower than stock volatility, but bonds also have offered lower historical returns because the debt holder is not an equity owner and typically does not participate in company profits or value appreciation.
New bonds are issued through an underwriting process in which securities firms or banks form a syndicate which buys all the bond debt from the borrower and resells the bonds to institutional and individual investors. Government bonds are typically issued through an auction. The secondary bond market comprises mostly decentralized venues where secondary trading occurs between dealers, such as investment banks and other institutions, in the over-the-counter markets. These dealers provide liquidity to the markets and take trading risk. Some corporate bonds are listed on exchanges, with the NYSE being the largest centralized bond market.
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