Definition:
A bond is a debt security issued by a corporation, government, or other entity to raise capital. When you buy a bond, you are essentially lending money to the issuer. In return, the issuer promises to pay you interest on the loan and to repay the principal amount at maturity.
Types of bonds:
- Corporate bonds: Issued by corporations to raise capital for business operations.
- Government bonds: Issued by governments, including federal, state, and local governments.
- Municipal bonds: Issued by municipalities, such as cities, counties, and school districts.
- Treasury bonds: Issued by the U.S. Treasury Department.
Key characteristics of bonds:
- Face value: The amount that the bond will be redeemed for at maturity.
- Coupon rate: The interest rate paid on the bond.
- Maturity date: The date on which the bond will mature and the principal will be repaid.
- Credit rating: A rating assigned to a bond by a credit rating agency that reflects the issuer’s creditworthiness.
Why are bonds used:
- Financing: Bonds are a popular way for companies and governments to raise capital.
- Income generation: Investors can earn interest income from bonds.
- Safety: Bonds are generally considered to be safer investments than stocks, as they have a fixed maturity date and a known interest rate.
However, it’s important to note that bonds are not risk-free. Bond prices can fluctuate in response to changes in interest rates and the creditworthiness of the issuer.
In essence, a bond is a debt security that represents a loan to an issuer, and it offers investors the potential for income and capital appreciation.
