Bond

SimpMe Says

Tony runs a frozen ice business called Tony’s Italian Ice Cart. Every week, Tony has the equipment to make 4 batches of Italian ice. In May, however, the weather is so hot that extra customers come to Tony’s cart! With these extra customers, Tony now needs to make 6 batches of Italian ice, but he needs to buy a larger freezer that will cost him $1000. There’s only one problem: Tony can’t buy the freezer until he has $1000! Tony could save up until the end of the summer, but if he waits, he will miss out on extra sales! In order to purchase the freezer before the summer, Tony asks his friends for the $1000. Every month, as he makes sales with his new equipment, Tony will pay his friend a small percent of interest, and at the end of the summer, Tony will repay the $1000 to his friend.

Now, Tony was able to grow his business while the market was hot! This transaction is similar to a bond. When businesses, cities, or governments (like Tony) need large sums of money, they will set up a bond, where investors like Tony’s friend can lend their money. Over time, the investor will receive interest, and he will receive the entire investment back at the end of the bond. The “end” of a bond is called the maturity date. For Tony, the maturity date was the end of the summer when he paid his friend back the full $1000.

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