What is a Bond?

A bond is a type of debt security that represents a loan made by an investor to a borrower, typically a corporation or a government entity. When an investor buys a bond, they are essentially lending money to the borrower in exchange for regular interest payments and the promise of repayment of the principal amount at a specified date in the future.

Bonds typically have a fixed term, or maturity date, which can range from a few months to several decades. The interest rate on a bond, also known as the coupon rate, is typically fixed at the time of issuance and remains constant throughout the life of the bond.

Bonds can be issued by corporations, governments, and other entities to raise capital to finance operations, capital expenditures, or other projects. Bonds issued by corporations are known as corporate bonds, while those issued by governments are known as government bonds or sovereign bonds.

Bonds are generally considered to be less risky than stocks, as they typically offer a lower rate of return but also provide a more stable source of income. However, bonds do carry some risks, including the risk of default by the borrower, the risk of inflation eroding the value of future interest payments, and the risk of changes in interest rates affecting the value of the bond.

Investors can buy and sell bonds on the open market, either directly or through bond mutual funds or exchange-traded funds (ETFs). The price of a bond can fluctuate based on changes in interest rates, credit ratings, and other factors.