To laymen, the terms Bonds and Notes are vague and hard to place the similarities and the divergence that occurs between them. To clarify this issue, let’s break these two down.
In a simplified explanation, bonds are a sort of financial loan from an Investor to a borrower. For bonds, borrowers are usually companies or government bodies. These funds are most times used for corporate or governmental running and projects. In return, the borrowers offer interests annually or bi-annually to the investor for a stipulated period in time. At the end of the bond tenure, the investor receives back his or her initial amount.
This is quite similar to bonds in that they are also loans, but in this instance, it is an agreement stating that a borrower owes and is obligated to pay an amount owed to the investor. Here there are usually pre-established interest rates and shorter time frames than bonds.
Bonds and notes are two kinds of debt securities that companies and government bodies can utilize to raise general operations or projects capital.
What Are the Similarities Between the Two Terms?
- They are both debts. In both scenarios, a company or a government body borrows and is expected to make a refund, usually accompanied by some percentage of interest. The details of this agreement are spelt-out.
- Both bonds and notes payable can all be purchased directly from the Treasury. Also, it can be purchased through a broker. The broker stands between the borrower and the investor and ensures that all terms and conditions are legal and met according to regulatory standards and agreements.
- They both have a fixed interest rate; apart from that, they kick off interest payments once every six months. After which interests can be made every four, six or 12 months.
- There is a minimum amount for investors to invest in bonds or loans. Likewise, there are a minimum borrowing amount companies and government bodies are allowed to borrow. There is also a preset increment amount for borrowers and investors. For Eg, the United States has an increment value of $1000. Meaning investors who wish to invest more than the minimum investment amount must do so in multiples of $1000, and borrowers looking to get a loan beyond the minimum amount can only do so in multiples of $1000.
- Both notes payable and bonds are sold at their face value
- They are both issued electronically; it is not based on paper written agreements between both parties involved.
- They both have a present maturity date where the broker must pay the initial fund amount back.
The Divergence Points Between Bonds and Notes
The divergence is in the rules that guide them. Both have a different approach to the laws that guide them. Bonds are usually longer termed and can last well over a year before their maturity date. However, notes are usually short-term loans and would generally reach their maturity date in a year or less.
The point to be driven home about this is that notes payable and bonds are for practical use and focus on the same thing: debt security. They are both used by companies and government agencies to raise funds for almost any operation or project. The transactions are not done through a borrower, lender system, but a broker stands as the link between the two.
The broker stands as the point of borrowing loans and where the investor goes to offer funds. Both security bills have preset maturity dates, interest rates, and interest payment dates. In terms of risk factors, both bonds and notes can have high risks and low risks. However, note that the greater the risk, the greater the interest and the lower the risk, the lower the interest rate.