When a country borrows money it gives a guaranty that the money will
be returned at a particular time and that interest will be paid at
regular intervals at a fixed rate. This guaranty is called a bond. In
actual practice, instead of borrowing the money required and then
giving bonds for its return, countries usually issue the bonds first,
and sell them to the highest bidder. For instance, if our government
needed to borrow $1,000,000 it would issue bonds for this amount,
stating definitely the rate of interest to be paid, and call for bids.
If the rate of interest were four per cent. and a buyer paid more than
$1000 for a $1000 bond he would, of course, make less than four per
cent. upon his investment. Such bonds are absolutely safe and always
marketable on account of our strong financial standing among the
nations of the world. Similar bonds are issued by States, cities,
towns, school districts, etc. They are not mortgages in the ordinary
sense, and their worth consists entirely in the ability of the issuer
through its taxing power to meet the obligations incurred. Municipal
bonds are issued by cities and other municipalities to raise money for
local improvements.