A bond is a fixed-income investment instrument that represents a loan made by an investor to a borrower, typically a corporation or government. When an entity issues a bond, it promises to pay back the principal amount, known as the face value, at a specified maturity date. In return, the issuer usually pays periodic interest payments, known as coupon payments, to the bondholder.
Bonds are used by companies and governments to raise capital for various purposes, such as financing projects or paying off existing debts. Investors buy bonds with the expectation of receiving steady income from interest payments and the return of principal at maturity. The bond market is an essential component of the overall financial system, providing a mechanism for borrowing and lending while offering investors a relatively secure investment option compared to stocks.
The relevance of bonds in finance is underscored by their role in portfolio diversification, risk management, and determining interest rates in the economy. Bond prices can fluctuate based on interest rates, inflation, and the creditworthiness of the issuer, making them a vital area of study for investors and financial analysts.
