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What is Bond?

A bond is a debt security issued by a government, municipality, or corporation to raise capital. It represents a loan made by an investor to the issuer, with the promise of regular interest payments and the return of the principal amount at maturity. Bonds are considered fixed-income investments as they provide a fixed or predictable stream of income over a specified period.


Key characteristics of bonds
  • 1. Face Value/Principal: The amount borrowed by the issuer, which will be repaid to the bondholder at maturity.
  • 2. Coupon/Interest Rate: The fixed or floating interest rate paid by the issuer to the bondholder. It is usually expressed as a percentage of the face value and determines the periodic interest payments.
  • 3. Maturity Date: The date on which the issuer is obligated to repay the principal amount to the bondholder. Bonds can have short-term (less than one year), intermediate-term (one to ten years), or long-term (more than ten years) maturity periods.
  • 4. Yield: The effective annual return on a bond, taking into account its price, coupon rate, and time to maturity.

Bonds are generally considered less risky than stocks as they offer a predictable income stream and the return of principal upon maturity. They are often used by investors seeking more stable investments and income generation. Bonds can be bought and sold on the secondary market, and their prices may fluctuate based on interest rates, credit ratings, and market conditions.

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