what is bond

A bond is a type of security under which the issuer owes the holder a debt and is obliged to provide cash flow to the creditor, depending on the terms. Bonds are a form of loan or IOU, where the issuer (debtor) owes the holder (creditor) a debt and is obliged to repay the principal (i.e. amount borrowed) of the bond at the maturity date as well as interest (called the coupon) over a specified amount of time. Bonds can be issued by companies or governments and generally pay a stated interest rate. The timing and the amount of cash flow provided varies, depending on the economic value that is emphasized upon, thus giving rise to different types of bonds. The interest is usually payable at fixed intervals: semiannual, annual, and less often at other periods. The market value of a bond changes over time as it becomes more or less attractive to investors, and bond prices are inversely correlated with interest rates: when rates go up, bond prices fall and vice-versa. Bonds can be a lower-risk investment than equities, making them a key component of a well-rounded investment portfolio. They can help hedge the risk of more volatile investments like stocks and provide a steady stream of income during retirement years while preserving capital.