When a company borrows money from a bank, then it gives the bank a bond. The bond is proof of the company’s debt to the bank and is evidence of its obligation to repay the loan on time, plus the bond defines the interest rate that has been agreed upon between the company and the bank. The interest represents the payment that the company must make in order to use the bank’s money.

If Bank A lends Company A $100,000 for one year at 5% annual interest on January 1, 2008, then the company will give the bank a bond stating that the company undertakes to pay the bank $100,000 (i.e., the principal), plus $5,000 in interest totaling $105,000 on December 31, 2008. This means that the bond will be redeemed on December 31, 2008 for $105,000.

The bank is entitled to sell the bond to any other party unless the company has explicitly forbidden this. At the end of the year, the company must pay $105,000 to whomever presents the bond to it for payment. After the company pays the money and receives the bond, it stamps the bond “canceled”.