Bond
A bond is a debt security where an investor loans money to an entity (typically corporate or governmental) for a defined period at a fixed or variable interest rate.
Key Characteristics
- Debt Instrument: Represents a loan made by an investor to a borrower
- Fixed Income: Provides regular interest payments (coupons) and return of principal at maturity
- Maturity Date: The date when the principal amount must be repaid
- Face Value: The amount paid to the bondholder at maturity
Types of Bonds
- Government Bonds: Issued by national governments (e.g., U.S. Treasury bonds)
- Municipal Bonds: Issued by states, cities, or local governments
- Corporate Bonds: Issued by companies to raise capital
- High-Yield Bonds: Higher-risk, higher-return bonds with lower credit ratings
Bond Pricing and Yield
Bond prices move inversely to interest rates. When rates rise, bond prices fall, and vice versa. The yield of a bond represents the return an investor will receive if they hold the bond to maturity.
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