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Basics
Beginner
15 min

What Are Bonds?

Learn the fundamentals of bonds, how they work, and why they are essential financial instruments for both investors and governments.

What Are Bonds?

A bond is a fixed-income financial instrument that represents a loan made by an investor to a borrower. When you buy a bond, you are lending money to the issuer in exchange for periodic interest payments and the return of the bond's face value when it matures.

Key Bond Terminology

  • Face Value (Par Value): The amount paid back at maturity
  • Coupon Rate: The annual interest rate paid on the bond
  • Maturity Date: When the bond expires and face value is repaid
  • Yield: The effective return on the bond

    • How Bonds Work

  • An issuer (government or corporation) issues a bond
  • Investors purchase the bond, lending money to the issuer
  • The issuer pays regular interest (coupon payments)
  • At maturity, the issuer repays the face value

    • Why Invest in Bonds?

  • Steady Income: Regular coupon payments
  • Capital Preservation: Lower risk than stocks
  • Diversification: Balance a stock-heavy portfolio
  • Predictable Returns: Known interest rate and maturity

    • Key Takeaways

    • Bonds are loans to issuers that pay regular interest
    • They provide steady, predictable income
    • Government bonds are generally safer than corporate bonds
    • Key terms: face value, coupon rate, maturity, yield

    Quiz

    3 questions to test your knowledge