A bond is a loan under a different guise. It is a security issued by an authorized entity, which promises to repay borrowed money under set terms (the most important are interest and duration) on a given date. There are a plethora of bonds, mainly distinguished by who issues them.
Federal Savings Bonds
The U.S. Treasury has a range of bonds. Most ordinary investors in Federal bonds are familiar with Treasury Savings Bonds of the I or EE Series. These are nontradeable debt instruments that offer investors a savings tool protected from inflation.
Federal Treasury Bonds
The other U.S. Treasury debt instruments are traded on the bond market. These are distinguished by when they typically mature, and when they pay interest. Treasury Bills mature in 1 year or less, and pay interest only at maturity. Treasury Notes are for between 2 to 10 years, and accumulate interest every 6 months. Treasury Bonds are for between 10 to 30 years, and also accumulate interest every 6 months.
Municipal bonds are issued by cities, counties and other local government agencies. This is typically done to raise money for a specific project, like putting all the electrical lines underground or building a new bridge. The terms on these bonds are therefore highly variable, but they are not taxed by the Federal or local government.
Corporations and banks sometimes also need to raise capital, and one way they do this is by making a bond issue. These bonds almost always mature at least 1 year after issue. Some come with special features, such as the convertible bond, which allows a bond holder to convert the value into that company's stock.
Regardless of who issues them, all bonds have three basic features: the interest rate, the date of maturity and the denomination. For example, a $5,000 bond issued at 4 percent interest for 25 years will pay either compound or simple interest on the bond amount until the date of maturity.
Each type of bond has its own degree of risk. U.S. Savings Bonds are very low risk. They are guaranteed by the Federal government and protected from inflation, but they also have a low rate of return. Normal Treasury Bonds are also viewed as being low risk, because they are also backed by the U.S. government. However, they are not protected from inflation, which makes the 1 year or less Treasury Bill the safest, because inflation can be predicted for the next several months but not for the next 10, 20 or 30 years. Municipal bonds are also relatively safe, although not as safe as Federal bonds, because city governments can go bankrupt. Corporate bonds are the riskiest, because there the company that issued them may go out of business.