11  Bonds

There are different ways to borrow money depending on the amount and the use it is meant for. Most people borrow money from banks and other financial intermediates. Governments and corporations typically borrow much more money and can therefore issue promises of payment (IOUs) directly to lenders.

Such promises can be of short duration, in which case they are called notes or commercial paper, or of longer duration, in which case we call them bonds. Bonds have longer maturity, implying that the principal will be paid back more than one year from issuing date. Meanwhile, the issuer pays a coupon on the principal as compensation for the possible loss of purchasing power (inflation) and the possibility of loss of capital (default). If the ...

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