What is bond?

People buy bonds as investments, similar to buying stocks. The difference, though, is that bonds are much less risky than stocks. And, while both can be traded, bonds usually earn less money than stocks do.
Bonds are technically loans. They can be from the government, corporations, or municipalities (cities and towns). When you buy a bond, you are essentially loaning money to whomever you are buying the bond from. In return, they pay you a fixed amount of interest over a certain period of time. You get your money and the interest it has earned when the bond matures.

Bonds can also be bought and sold at any time without penalty; you don't have to wait until they mature.

Types of Bonds

Government Bonds
To fund government programs, meet its payrolls, and essentially pay its bills, the U.S. Government issues its own bonds from the Treasury (T-bills and T-Notes) and from several government agencies. Because these bonds are backed by the government, they pay a fixed amount of interest and are, therefore, virtually risk free. Government bonds mature in one to 50 years. In some cases, you don't have to pay state or local income taxes on the interest they earn.

Corporate Bonds
Corporate bonds are issued by businesses to help them pay expenses. While corporate bonds are a higher risk than government bonds, they can earn a lot more money. There is also a much larger selection of corporate bonds. You do have to pay federal income tax on the interest they earn.

Municipal bonds
Municipal bonds (also called "munis") are issued by states, cities, counties and various districts to raise money to finance operations or to pay for projects. They finance things like hospitals, schools, power plants, streets, office buildings, airports, bridges, etc. Municipalities usually issue bonds when they need more money than they collect through taxes (for example, when they overspend). It's sort of like having a bake sale.

The good thing about municipal bonds is that you don't have to pay federal income taxes on the interest they earn. Many are also free from state and local taxes in the state in which they are issued. Municipal bonds may be secured or unsecured. To be secured means to be backed by collateral, like revenue bonds. To be unsecured is to be without collateral.

Bond terminology
Bonds may have characteristics that are good for the buyer (that would be you), the seller, or both. Here are some features a bond may (or may not) offer:

Mature - Bonds have lifetimes. Depending on the type of bond, that lifetime can last anywhere from one month to 50 years.

Callable - This is a term that means the company or agency that issued the bond has the right to call the bond back in at a time of their choice. In other words they buy the bond back before it matures. They might do this at a time when interest rates are falling in order to issue new bonds at lower rates so they'll save money. This isn't always a bad deal for those who bought the bonds either, because there is an extra "premium" added to the face value of the bond.

Put provision - Just as callability allows the seller to call the bond back before it matures, some (but not too many) bonds have a "put provision" that gives the person who bought the bond a chance to sell it back at face value before it matures. It can't be done at any time, however; the seller must schedule this ahead of time. People who own bonds sometimes "put" their bonds when interest rates are rising so they can invest their money where it will earn more.

Convertible bonds - Sometimes bonds can be converted into stock in the company that issued them. At the time the convertible bonds are issued, exactly when and at what price they can be converted to stocks is specified. This type of bond usually offers lower interest rates initially, but they also offer the potential for higher earnings as a stock.

Secured bonds - Bonds that are backed by collateral are called "secured" bonds. This means that the company or agency that issued the bond also has money or assets to cover the bond's value. This money or the assets would be given to the people who bought the bonds in the event the company went bankrupt.

Unsecured bonds - Also called debentures, unsecured bonds are not backed by collateral, they're simply backed by the creditworthiness of the company or agency issuing the bonds. Government bonds are unsecured because the U.S. government is so creditworthy.