A bond is a loan. Bonds, like loans, have less risk than equity (if there is a bankruptcy, the debt holders get preferred treatment) and less reward on the upside: that is, the most that debt holders can receive is the agreed upon interest payments and the principal returned at maturity.

But, loans to corporations and governments are substantial in size. A total loan would bulk large in most portfolios: and loan instruments are difficult to transfer. By dividing a loan into small pieces and establishing easy transferability, bonds are designed to increase investors’ willingness to purchase loans. The design has been popular — in the U.S., the amount of bonds in circulation is roughly double the amount of publicly traded equity. Bonds are now a crucial element of the financial system, facilitating capital formation and accommodating the borrowing needs of both public entities and private individuals (through the mortgage-backed markets).