The bond holder is a long-term creditor of the issuing corporation. Interest payments to bond holders are made first out of the company’s gross profits. Bond holders who cannot participate in the company’s management cannot raise any claims over the company’s assets after they have been paid their receivables.
The legal relationship between the bond holder and the company ends at the end of the term. The bond investor does not share in the profit-loss risk of the issuing company, and collects its principal and interest payments when due even if the company records a loss. For the bond holder, a risk exists only when the company is unable to pay the principal and interests of the bond. However, because a bond is a note payable, the principal and interests of the payable can be collected via legal means when necessary. In the case of bankruptcy or liquidation of the company, debts are paid in the first place, i.e., bond holders collect their receivables due from the company in priority to shareholders.