A bond represents a loan from an investor to a government, corporation, or other organization. The issuer promises to pay scheduled interest—called coupon payments—and return the original amount, known as principal or face value, when the bond matures.
Bonds differ in duration, credit quality, interest rate structure, and purpose. Government bonds are generally issued to finance public spending. Corporate bonds raise capital for business operations, expansion, or refinancing. There are also municipal bonds, international bonds, and specialized categories such as inflation-linked or zero-coupon bonds.
Most bonds have a fixed maturity date, clear cash-flow expectations, and defined risk levels. Investors evaluate bond risk based on the issuer’s credit rating, interest rate conditions, and overall economic environment. Because bonds provide predictable income, they are often used to stabilize portfolios and balance equity exposure.
Bonds are essential for financing government and corporate activity. For investors, they offer income, diversification, and lower volatility compared to many equity investments.
Bond prices and interest rates move in opposite directions. When interest rates rise, existing bonds become less attractive because new bonds offer higher yields, causing their prices to fall. When rates decline, existing bonds with higher coupon payments become more valuable, and their prices increase. This relationship is a core principle of fixed-income investing and affects portfolio strategy, valuation, and risk management.
Credit ratings assess the likelihood that an issuer will meet its interest and principal obligations. Higher-rated bonds (such as investment-grade) indicate lower credit risk and typically offer lower yields. Lower-rated bonds (high-yield or “speculative”) offer higher potential returns but carry a greater risk of default. Investors use ratings to compare issuers, manage risk levels, and align bonds with their financial goals.
Short-term bonds offer lower interest rate risk and provide more frequent reinvestment opportunities. Long-term bonds usually pay higher yields but are more sensitive to interest rate changes. Investors make this choice based on income needs, risk tolerance, economic outlook, and how long they plan to hold the investment.
A company issues a 10-year bond with a fixed 4% annual coupon. Investors receive interest payments each year and are repaid the bond’s face value at maturity, assuming the company meets its obligations.
