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Bonds

Bonds are debt securities issued by corporations, governments, or other entities to raise capital. When an investor buys a bond, they are essentially lending money to the issuer in exchange for periodic interest payments, known as coupons, and the return of the bond's face value (principal) upon maturity. Bonds are typically categorized by their issuer (e.g., government bonds, corporate bonds), maturity, and credit quality. They are considered lower-risk investments compared to stocks, offering more predictable returns, but they are also subject to interest rate risk, credit risk, and inflation risk.

Example

An investor purchases a 10-year U.S. Treasury bond with a face value of $1,000 and a 3% annual interest rate. The investor receives $30 in interest each year and the $1,000 principal back at maturity.

Key points

• Bonds are debt securities that pay interest and return the principal at maturity.

• Issued by governments, corporations, and other entities.

• Considered lower risk than stocks but subject to interest rate and credit risks.

Quick Answers to Curious Questions

The main types include government bonds, corporate bonds, municipal bonds, and agency bonds, each varying in risk and return.

Bonds are debt instruments with fixed interest payments and a maturity date, whereas stocks represent equity ownership in a company with variable dividends and no maturity.

Key risks include interest rate risk (bond prices fall when rates rise), credit risk (issuer may default), and inflation risk (inflation erodes purchasing power).