What Is a Bond?
A bond is a debt security in which an investor lends money to an issuer, typically a corporation or government, in exchange for periodic interest payments and the return of the principal at a set maturity date. Unlike a stockholder, a bondholder does not own any part of the issuer; they are a creditor.
Bonds are defined by a few key terms: the face value (or par value) repaid at maturity, the coupon rate that determines interest payments, and the maturity date when the loan comes due. A bond with a $1,000 face value and a 5% coupon pays $50 per year.
How It Works
After a bond is issued, it trades in the secondary market and its price moves with interest rates and the issuer's creditworthiness. Prices and yields move in opposite directions: when market interest rates rise, existing bonds with lower coupons become less attractive, so their prices fall until their yields match the market.
Credit risk matters too. Rating agencies grade issuers from investment grade down to speculative, or junk, status. Riskier issuers must offer higher yields to compensate investors for the greater chance of default.
Example
Imagine a company issues a 10-year bond with a $1,000 face value and a 4% annual coupon. You collect $40 per year for ten years, then receive your $1,000 back at maturity. If rates in the market later rise to 6%, your bond's price might fall to roughly $850 so that a new buyer earns a competitive yield.
If you hold to maturity and the issuer does not default, you still receive every coupon and the full face value, regardless of where the price traded in between.
Why It Matters
The global bond market is larger than the stock market and funds everything from government spending to corporate expansion. Bonds also anchor portfolio construction, since they typically provide steadier income and lower volatility than equities.
In finance careers, bonds sit at the center of debt capital markets, credit analysis, and fixed income sales and trading, where professionals price new issues and assess whether issuers can service their debt.
