Bonds are debt instruments where you lend money to a government, corporation, or other entity for a fixed period, and in return, the issuer agrees to pay you interest and repay the principal at maturity

How Bonds Work

• Issuance: When a bond is issued, the borrower (issuer) sets a face value (e.g., $1,000), a fixed interest rate called the coupon rate, and a maturity date when the principal will be repaid

• Interest Payments: The issuer pays periodic interest (coupon payments) to the bondholder, typically annually or semiannually, based on the coupon rate and face value. For example, a 5% coupon on a $1,000 bond pays $50 per year

• Maturity: At the end of the bond's term, the issuer repays the original face value to the bondholder, concluding the loan

• Secondary Market: Bonds can be bought and sold before maturity on the secondary market. Their prices fluctuate inversely with prevailing interest rates-if market rates rise, bond prices fall, and vice versa

Key Points

• Bonds are considered fixed-income investments because they provide predictable interest payments

• The bond price depends on credit quality, time to maturity, and how the coupon compares to current interest rates

• Bonds have credit ratings indicating their risk; higher-rated bonds are safer but usually offer lower yields, while lower-rated bonds offer higher yields but more risk

• Risks include default risk (issuer failing to pay), interest rate risk (price fluctuations), and inflation risk (fixed payments losing value over time)

In essence, buying a bond means you are lending money to the issuer in exchange for regular interest payments and the return of your principal at maturity, with the bond’s price fluctuating based on market conditions and interest rates