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Bond definition
A bond is a debt instrument that lets a government, municipality, or company borrow money from investors. The buyer of a bond lends money to the issuer in return for interest payments and the repayment of the original sum.
A bond usually pays interest through fixed coupon payments and returns its face value on the maturity date, the point at which the issuer must repay the principal. Before maturity, a bond's price can still rise or fall, because interest rates, inflation expectations, the issuer's credit quality, and market demand all feed into what investors will pay for it.
A bond differs from a share: a bondholder is a lender who ranks ahead of shareholders for repayment and earns a set return, while a shareholder is a part-owner whose return depends on profits and the share price. Investors hold bonds for income, capital preservation, and to balance the higher risk of equities.
Bond Example
You buy a 10-year corporate bond with a face value of USD 10,000 and an annual coupon rate of 5%.
Each year you receive interest of:
USD 10,000 √ó 5% = USD 500
At maturity, the issuer repays the USD 10,000 face value, as long as it does not default.
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