What Is a Bond?
A bond is a fixed-income investment in which an investor lends money to a government or corporation in exchange for regular interest payments and repayment of principal at maturity.
Definition
A bond is a debt security that represents a loan made by an investor to an issuing entity, such as a government or corporation. In return, the issuer agrees to pay periodic interest and to repay the original amount borrowed at a specified maturity date.
Bonds are classified as fixed-income securities because they typically provide regular, predetermined interest payments over the life of the bond.
How It Works
When an issuer sells a bond, it sets key terms including the face value, coupon rate, payment schedule, and maturity date. Investors receive interest payments, known as coupons, until the bond reaches maturity.
Most bonds are issued with a face value, commonly $1,000, which is repaid to the bondholder at maturity regardless of the bond’s market price during its life.
Why the Term Matters
Bonds are a core asset class used by governments and corporations to raise capital. They also provide investors with a structured way to earn income and preserve capital.
Understanding bonds helps explain how debt markets function and how interest rates, credit quality, and maturity influence investment values.
Related Concepts
- Fixed-income securities
- Coupon rate
- Face value (par value)
- Maturity date
- Credit rating
- Yield
FAQs
What is a bond?
A bond is a loan made by an investor to an issuer that pays interest and returns principal at maturity.
Who issues bonds?
Bonds are issued by governments, corporations, agencies, and municipalities.
What is the face value of a bond?
The face value is the amount repaid to the bondholder when the bond matures.
What is a coupon rate?
The coupon rate is the interest rate the bond issuer pays on the bond’s face value.
Do bond prices change before maturity?
Yes, bond prices can fluctuate based on interest rates, credit quality, and time to maturity.
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