Businesses raise capital through the use of either debt or equity. Organizations use equity to obtain capital by issuing stock in the company. Organizations use debt to obtain capital either by obtaining loans or by issuing bonds. Bonds are debt securities. Debt securities have advantages to the organization raising capital and to the investor purchasing the debt.
Investing in debt securities generally has less risk than investing in equity securities. Bonds fluctuate less in the market. Bond values vary with interest rates, but they have a known value at their maturity dates. Risks in bonds include that the issuing entity may become insolvent and unable to meet its obligations, that the bond may change in value due to interest rate changes, or in some cases, that the bond may be called prior to maturity. In the event a corporation goes bankrupt, bondholders must receive their funds back before any funds can be given to stockholders.
Bonds pay interest at a set rate. Corporate bonds typically pay interest semi-annually. Investors will receive the face value of the bond from the corporation when the bond matures. Investors know in advance what they can expect to receive.
Bond yields are generally higher than the interest you could get at the bank through savings accounts or CDs. Investors benefit from higher interest rates, as their investments grow at a greater rate.
There are many types of bonds. In addition to bonds issued by corporations, there are also bonds issued by the Federal Government, states and municipalities. Bonds issued by the U.S. Government are considered to be very low-risk investments. Lower-risk bonds tend to have lower yields; higher-risk bonds tend to have higher yields--but with less assurance that you will actually receive the funds.