What is a Bond?
A bond is a fixed-income investment that represents a loan made by an investor to a borrower, typically a corporation or government.
In simpler terms, when you buy a bond, you are essentially lending money to the issuer in exchange for periodic interest payments and the return of the bond's face value when it matures.
How Bonds Work
Bonds are characterized by several key features:
- Face Value: This is the amount the bond will be worth at maturity, and it is also the amount the issuer agrees to pay the bondholder upon maturity.
- Coupon Rate: This is the interest rate that the bond issuer pays to the bondholder, expressed as a percentage of the face value.
- Maturity Date: This is the set date in the future when the bond will mature, and the issuer will repay the principal to the bondholder.
Types of Bonds
There are various types of bonds, including:
- Government Bonds: Issued by national governments, these are considered low-risk.
- Corporate Bonds: Issued by companies to raise capital, typically with higher risk and return.
- Municipal Bonds: Issued by local governments, often tax-exempt.
Benefits of Investing in Bonds
Bonds can provide a steady income stream and diversify an investment portfolio. They are generally less volatile than stocks, making them a safer investment option for risk-averse investors.