Bond

Debt security where investors lend money to an issuer for periodic interest.

A bond is a fixed-income instrument that represents a loan made by an investor to a borrower, typically a corporation or a government entity. The borrower uses the capital to fund projects, operations, or refinance existing debt, while promising to pay the investor regular interest payments and return the original principal amount when the bond matures. Bonds are characterized by several key features: the face value (par value), which is the amount the issuer must pay back at maturity; the coupon rate, which determines the periodic interest payments; and the maturity date, which is when the loan ends. Unlike stocks, bonds do not grant ownership equity in the issuing entity, meaning bondholders are creditors rather than owners. Investors care about bonds because they generally offer a more stable and predictable stream of income compared to equities, making them a cornerstone of conservative portfolio allocation. However, bonds are subject to several risks, primarily interest rate risk (when interest rates rise, bond prices fall) and credit risk (the danger that the issuer might default on its payments).

An investor purchases a newly issued corporate bond with a face value of $1,000, a coupon rate of 5%, and a maturity of 10 years. The issuer will pay the investor $50 in interest every year (calculated as $1,000 0.05) for 10 years. At the end of the 10th year, the issuer returns the original $1,000 principal to the investor.