A bond is debt to whoever sells the bond to an investor. For example, if you buy an IBM bond, you are loaning money to IBM instead of a bank loaning money to them. Just like a bank, you are going to charge IBM interest on your money, as well as a return of the principle when the loan is due (ten years or so).

Why doesn't a company just go to a bank to borrow the money, instead of selling bonds? Because the company wants to borrow more money than the bank is willing to loan. The banks aren't loaning the money because they feel that there is too much risk; but remember, banks are tight with money. Just because a bank thinks loaning the money is too risky, doesn't mean that loaning money isn't a good idea.

The risk of loaning money to a company (buying corporate bonds) is graded. You can buy a AAA bond and feel comfortable, but a D bond is in default (company can't pay back your money). In the middle there are AA, A, BBB, BB, B, CCC, CC and C bonds. The closer a company gets to D, the higher the risk there is that they company will be unable to pay back their loan (buy back their bond). What a company does to lure investors to buy their bonds despite their BBB or B ratings -- is to offer a better interest rate than the AAA and A bonds. If you are going to loan money to a company with the risk of losing your money, you need something in return. By the way, these lower grade bonds are also called junk bonds (made famous by Michael Milken/Drexel Burnham Lambert in the 80s) and may carry a little too much risk to be bought by individual investors. But, if you're interested, put part of your portfolio into a junk bond fund. Junk bond funds allow you to take part in the sometimes lucrative world with less risk, as long as this is only a portion of your investment portfolio.

Besides corporate bonds (loaning to companies), you can buy government bonds (treasury bonds).  Treasury bonds are how the government controls the nations money supply.  If they want to reduce the money supply, the open market committee (group that handles gov. bonds) sell bonds to the public.  They sell bonds and get money, which reduces the amount of money flowing throughout the country.  If they want to increase the money supply, they buy back bonds with cash, increasing the amount of money throughout the country.

I'm getting off the point though.   Just like companies, you can loan money to the government.  Government bonds are considered guaranteed, with no risk of default.  Because of this, the interest rate on government bonds is lower than that of corporate bonds.