What Are Bonds?

Introduction

A bond is a loan you make to a company or government. In return, they pay you regular interest and repay the principal at maturity. Bonds are the main "fixed income" investment.

How a Bond Works

You lend $1,000  ->  borrower pays you coupon (interest)
                      ->  at maturity, you get your $1,000 back

Key terms:

• Par value (face value) — the amount repaid at maturity
• Coupon — the regular interest payment
• Maturity — the date the principal is repaid
• Issuer — the borrower (government or company)

Bonds vs Stocks

• Bonds are debt — you're a lender, not an owner
• Bondholders are paid before stockholders if the issuer struggles
• Bonds generally have lower risk but also lower expected return than stocks
• Bond interest is typically fixed and predictable

The Risks

Bonds are not risk-free:

• Default risk — the issuer might fail to pay
• Interest-rate risk — rising rates lower bond prices
• Inflation risk — inflation can erode the real return

Why Investors Hold Bonds

Bonds provide income and stability, balancing the volatility of stocks in a portfolio. Many retirees favor bonds for predictable cash flow.

Real-World Example

A company issues a 5-year bond with a 4% coupon. You buy $1,000 of it and receive $40 each year. After 5 years, the company returns your $1,000. You earned $200 in interest (assuming no default).

Summary

• A bond = a loan to a company or government
• Issuer pays coupons and repays par value at maturity
• It is debt, not ownership; lenders get paid before stockholders
• Bonds are generally lower-risk, lower-return than stocks
• They add income and stability to a portfolio

Next Lesson

Prices, yields, and duration — how bonds really behave.