What Is a Bond?

A bond is a fixed-income instrument that represents a loan made by an investor to a borrower (typically corporate or governmental). A bond could be thought of as an I.O.U. between the lender and borrower that includes the details of the loan and its payments. Bonds are used by companies, municipalities, states, and sovereign governments to finance projects and operations. Owners of bonds are debtholders, or creditors, of the issuer.

Bond details include the end date when the principal of the loan is due to be paid to the bond owner and usually include the terms for variable or fixed interest payments made by the borrower.

KEY TAKEAWAYS

• Bonds are units of corporate debt issued by companies and securitized as tradeable assets.
• A bond is referred to as a fixed-income instrument since bonds traditionally paid a fixed interest rate (coupon) to debtholders.
• Variable or floating interest rates are also now quite common.
• Bond prices are inversely correlated with interest rates: when rates go up, bond prices fall and vice-versa.
• Bonds have maturity dates at which point the principal amount must be paid back in full or risk default.