Bonds: The Unbeaten Path to Secure Investment Growth

Chapter 4. THE EVOLUTION OF A BOND From Verbal IOU to Electronic Entry

BONDS ARE NEGOTIABLE or salable loans, and there is a ready marketplace in which to trade them—a big advantage for investors. In 1704, England passed a law making loans negotiable. Today, bonds can be traded like wheat and pork in the commodity markets. The bond markets are called the credit markets, the place where governments and corporations come to gather money to create their dreams. Formerly the province of bankers and kings, these markets are now open to everyone.

Learning the Language

To fully understand these markets, it helps to know why they exist as they do. And while it is true that bond brokers speak English, they use expressions that act as shorthand, creating an often inscrutable language in the process. To make learning their lingo and the forms it describes interesting, we trace the development of the words through bond history.

Financial language derives from a vocabulary created over the centuries. This vocabulary is particularly puzzling to those new to marketable securities based on debt: namely, bonds, notes, bills, and other fixed-income investments. Based on U.S. case law, a bond, according to Black's Law Dictionary, is "a long-term, interest-bearing debt instrument issued by a corporation or governmental entity, usually to provide for a particular financial need; especially, such an instrument in which the debt is secured by a lien on the issuer's property."^[28] This is the definition we'll ...