What is a Bond?

A bond is a loan. When a company or government needs to raise money, it can borrow from investors by issuing bonds. In return, it promises to pay the investor regular interest over a set period of time, and to return the original amount at the end.

How does a bond work?

Say a company issues a bond worth $1,000 with an interest rate of 4% per year over 5 years. You lend them $1,000. Each year they pay you $40. After 5 years they return your $1,000. That interest rate is called the coupon, and the end date is called the maturity date.

Who issues bonds?

Governments issue bonds to fund public spending like roads, hospitals, pensions. These are often called government bonds or treasury bonds. Companies issue bonds to fund expansion or operations. These are called corporate bonds.

Are bonds safer than stocks?

Generally, yes. Bonds offer predictable returns and bondholders are paid before shareholders if a company goes under. But they are not risk-free. If a company goes bankrupt it may not repay you. And if interest rates rise, the value of existing bonds tends to fall.

Why do investors use bonds?

Bonds provide stability and income. They tend to move differently from stocks, which makes them useful for balancing a portfolio. Investors who are closer to retirement or who have lower risk tolerance often hold more bonds to protect their wealth.