What is a bond?

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.