What is a bond?

A bond is a contract for the payment of a debt similar to a promissory note where one party promises to pay another at a later time for a loan for something of value given. The only difference is a bond is based on some future occurrence of some act and sets forth the terms for one party to pay another upon performance or failure of performance of the agreement made between the parties.

When a third party, like an insurance company (bond company), "underwrites" the bond, they are signing on "under" the signature of the person needing the bond called the obligor which means one who has an obligation. The obligee is the party who is covered by the bond in the event the obligor fails to perform or performs a violation of the obligation. The bond company then has to pay the debt obligation on which the bond is based to ensure (insure) the obligee is covered. The bond company is now the "surety" who charges a premium to the obligor needing the bond. The obligor's premium when pooled with other people's premiums, creates the money needed to pay the debt.

In short, a bond is a contract (promise) to pay a debt or a promise of performance such as a bail bond.