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What is a bond?

Author:
Harold Averkamp, CPA, MBA

There are several business definitions for bond.

  1. A bond could be a formal debt instrument issued by a corporation or government and purchased by investors. This is the meaning when we say that a public utility issued or sold bonds to help finance a new power plant. Investors talk about investing in stocks and bonds.
  2. A bond is also used to describe a guarantee of another person’s obligation. For example, an insurance company might issue a $500,000 surety bond needed by a company in order to engage in transactions on credit. This use of bond means that the insurance company is guaranteeing that it will pay up to $500,000 if the insured company does not make its required payments for its purchases.
  3. We also use bond to mean that a company purchases insurance to protect itself from dishonest acts by its employees handling money. For example, some accounting textbooks state that a company’s employees should be bonded. However, the cost of such protection may far exceed the expected benefits.
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About the Author

Harold Averkamp

For the past 52 years, Harold Averkamp (CPA, MBA) has
worked as an accounting supervisor, manager, consultant, university instructor, and innovator in teaching accounting online. He is the sole author of all the materials on AccountingCoach.com.

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