What is a bond?
A bond is a debt investment in which an investor loans money to an entity, typically a government or corporation, for a defined period at a fixed interest rate. In return, the issuer of the bond agrees to pay periodic interest payments to the bondholder and return the principal amount (the initial loan) at the bond's maturity.
Here are some key elements of bonds:
- Issuer: The entity (government or corporation) that borrows money by issuing bonds.
- Bondholder: The individual or institution that lends money to the issuer by purchasing bonds.
- Face Value (Par Value): The principal amount of the bond, which is repaid to the bondholder at maturity.
- Coupon Rate: The fixed interest rate paid by the issuer to the bondholder, usually expressed as a percentage of the face value. Interest payments are typically made semiannually.
- Maturity Date: The date on which the issuer must repay the principal amount to the bondholder. Bonds can have short-term (e.g., less than one year), medium-term (e.g., 2-10 years), or long-term (more than 10 years) maturities.
- Yield: The effective interest rate of the bond, taking into account its current market price. It represents the return an investor can expect to receive if the bond is held until maturity.
Bonds are considered fixed-income securities because they provide a predictable stream of income through regular interest payments. They are traded on financial markets, and their prices can fluctuate based on changes in interest rates, credit ratings, and other market conditions. Bonds are often used by governments and corporations to raise capital for various projects or operations.
