Bonds and notes occupy a similar space in the world of investment and finance. Both constitute written agreements concerning borrowed funds and repayment methods for those funds. Enough similarities exist between bonds and notes that they may appear identical to those unfamiliar with the specifics of each. Despite these striking similarities, a handful of very important differences help distinguish bonds and notes from one another.
Companies, banks and other financial entities issue bonds as means of raising money. Individual bonds constitute parts of a larger loan. For instance, if a company wants $1 million it may issue 200 bonds priced at $5,000 each. Investors purchase bonds, earning money through interest paid. All bonds reach maturity at a predetermined point. Upon reaching maturity, the issuer of the bond buys it back from the investor. Maturity periods may range from five to more than 30 years. Some organizations issue bonds in a perpetual cycle as a means of maintaining a constant revenue stream.
Various types of notes exist, including promissory notes, notes payable and notes receivable. Companies, banks, organizations and individuals issue notes as a means of raising money. Notes may exist for myriad reasons. For instance, if a small business needs funds to purchase equipment, it may sell notes as a means of raising money, with the promise of paying that money back at a specific point. Banks and companies also issue notes as a means of generating short-term capital, as does the U.S. Treasury.
On the surface, notes and bonds prove more or less exactly the same. Both constitute financial documents issued at the point of an exchange of capital and detail the terms for the repayment of that capital. The issuers, or makers, of bonds and notes create and sell them as a means of raising money, using them like loans. Bonds and notes both reach maturity after a predetermined amount of time. Upon reaching maturity, the issuer of a bond or a note buys the document back at the initial cost. What's more, investors may purchase both as commodities.
Despite the similarities, a number of differences exist between notes and bonds. Bonds constitute individual parcels of a larger whole -- an issuer creates all bonds for one fund-raising project simultaneously. Notes, on the other hand, constitute individual loan documents unrelated to any other notes or bonds. Organizations often issue notes for specific reasons, while bonds constitute general commodities issued to raise capital. As a general rule, notes reach maturity faster than bonds, meaning they possess shorter life spans. However, the book "The Theory and Practice of Investment Management" points to notes issued by the Walt Disney Co. in 1993 with a maturity period of 100 years as an exception to this rule.
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