A bond is an obligation or promise to pay money, which differs from a promissory note in that it is given under seal, the effect of which addition is, under the common law, that if default is made and payment has to be enforced by suit, the maker cannot plead want of consideration.

When a government desires to borrow money the customary method of obtaining it is to print and offer its bonds for sale. These are issued in convenient denominations. In this country the most common denominations are $500 and $1,000, but sometimes, if the issue is what is called a popular one, designed for sale among people of small means, a portion of the issue is made in denominations of $100, or even less in some instances.

In fixing the rate of interest which the bonds shall bear, the government should, and usually does, take into consideration the condition of the loan market (commonly designated as the money market), and the state of its own credit, and makes the rate the lowest one at which it can reasonably expect to sell the bonds at par. If sold below par, the government will pay, and the investor will receive, more than the rate of interest named in the bond. The reverse is true if more than par is realized for the bonds. In general the nearer the selling price can be approximated to par the more favorable will it be for the maker, in the long run. Although it is not possible for the government to tell what price the bonds will bring until they are placed upon the market and offered for sale, it is usually possible to gauge this nearly enough for practical purposes. Still, to guard against the contingency of unfavorable bids, it is usual to reserve the right to reject any and all that may be submitted, and if all are rejected, to make a new offering at a later date, with such changes as seem likely to yield a better result.

The length of time the bonds are to run is also fixed by the government, and is a factor in the price they will bring in the market. This is because investors prefer bonds having comparatively long terms to run, which relieve them from the necessity of reinvesting at short intervals. Not infrequently bonds contain a clause giving the maker the option to call them in and pay them at any time after a specified date. This, while it enables the maker to retire them and stop the interest, usually causes them to sell at a lower price than if they ran for a fixed period, or, in other words, the maker, in consideration of the option of prepayment, has to pay a higher rate of interest for that privilege. As a rule, government bonds are not secured, but depend wholly upon the credit and stability of the nation by which they are issued. In the case of some of the weaker nations, as for instance Spain and China, some issues have been secured by a specific pledge of the revenue arising from certain customs duties. This, however, is the exception and not the rule in the case of government bonds. At different times the United States government has issued bonds to relieve the needs of its treasury. Those issued during the Civil War bore six per cent., but the credit of the country is now so exceptionally high that it is able to float its bonds at the very low rate of two per cent., and its later issues have been at that rate.

Refunding consists in putting out a new issue of bonds to replace an old one, which may either have matured or which may be called for payment (the option having been reserved) in order to gain the advantage of a lower rate of interest. Consolidated bonds or "consols" are those issued to refund several other issues, combining all into one.

Coupon bonds are those which are made payable to bearer and the interest on which is evidenced by detachable coupons. These coupons are torn off as they fall due, and are usually collected through some bank. Registered bonds are so called because the name of the owner is registered upon the books of the treasury department of the government issuing them. Sometimes the principal only is registered and the interest is evidenced by coupons, as in the case of bonds payable to bearer. This is the common practice in the case of bonds issued by private corporations. With government bonds it is usual for the interest to be paid by check mailed to the owner's address. The advantage of registration is that bonds of this kind, if lost or stolen, are of no value to the finder or the thief, and hence are very secure.

In the United States the term government bonds, or "governments," as they are called, is limited to bonds issued by the general government. State bonds, or bonds issued by the governments of the several states, are, however, also government bonds, and differ in no essential respect from those of the national government, except as to their legal basis. They rest on the credit of a part of the people instead of all the people taken together. This is true also of municipal bonds, as those are called which are issued by counties, cities, towns, school districts, sanitary districts, or other public corporations. They are usually put forth for the purpose of raising funds for local improvements, such as the erection of public buildings, the building of bridges, or of water works, or of electric lighting plants. In many of the states municipal governments cannot issue bonds lawfully in excess of a certain percentage upon the assessed valuation of taxable property in the municipality, and not then unless authorized by a majority vote of the people.