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Bonds are fixed-income financial instruments used by governments, corporations, and municipalities to raise funds. When these entities issue bonds, they are essentially borrowing money from investors, who in return receive regular interest payments (known as coupon payments) and the return of the principal amount at the bond’s maturity date.
Bonds are generally viewed as more stable investments compared to stocks, offering predictable income and lower risk, especially for conservative investors or those seeking capital preservation. They also hold a senior claim over stocks in the event of the issuer’s bankruptcy, making them a preferred choice for risk-averse portfolios.
The value and performance of bonds are influenced by factors such as interest rates, credit ratings of the issuer, and market conditions. As a core component of diversified investment strategies, bonds help balance risk while providing steady returns, especially in uncertain or volatile markets.
Also known as par value or principal amount, the face value of a bond represents the amount the issuer borrows from investors and commits to repay in full at the time of maturity.
The coupon rate is the interest rate the issuer agrees to pay bondholders. It may be fixed or floating and is calculated as a percentage of the bond’s face value. This rate determines the periodic interest payments made to investors.
Each bond has a defined maturity date—this is when the issuer repays the full face value to the bondholder. The maturity period can vary from a few months to several decades, depending on the bond type.
Bonds typically provide regular interest payments, known as coupon payments. These payments may be made monthly, quarterly, semi-annually, or annually and are calculated based on the bond’s face value and coupon rate.
Yield refers to the effective return an investor earns by holding the bond until maturity. It considers the bond’s current market price, coupon payments, and remaining time to maturity, offering a more accurate reflection of investment return than the coupon rate alone.
Independent credit rating agencies such as Standard & Poor’s, Moody’s, and Fitch assign ratings to bonds based on the creditworthiness of the issuer. Higher-rated bonds are viewed as lower risk, while lower-rated bonds offer higher yields but come with increased credit risk.
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