Bond

Definition of Bond

A bond refers to a debt security issued by governments or corporations to raise capital. It represents a contract in which the issuer borrows money from bondholders and agrees to repay the principal amount at a predetermined future date, along with periodic interest payments.

Bonds are tradable on financial markets and serve as a means for entities to access funding while providing investors with fixed income and relatively lower risk compared to stocks.

What is Bond?

A bond is a fixed-income investment instrument that allows governments and companies to borrow money from investors.

Investors who purchase bonds effectively lend money to the issuer in exchange for regular interest payments and the return of their principal investment upon maturity.

Bonds provide a stable source of income and are rated based on credit risk, with higher-rated bonds generally offering lower yields.

Types of Bond

Bonds come in various types, including government bonds (issued by national governments), corporate bonds (issued by companies), municipal bonds (issued by local governments), and convertible bonds (convertible into company stock).

Additionally, bonds can be classified by maturity, such as short-term (less than one year), medium-term (one to ten years), and long-term (over ten years) bonds.

What are examples of Bond?

Consider a corporation issuing a $1,000 face value, 5-year bond with a 5% annual coupon rate. An investor purchases this bond for $1,000. The investor receives annual interest payments of $50 (5% of $1,000) from the issuer. After 5 years, the investor also receives the $1,000 principal back.

Bonds offer a predictable stream of income and return of investment, making them a key component of diversified investment portfolios for those seeking stable returns with lower risk compared to other assets.