A bond is a type of security that represents a loan made by an investor to a borrower, typically a corporation or government. When an investor buys a bond, they are essentially lending money to the issuer and, in return, the issuer agrees to pay the investor periodic interest payments along the way, usually twice a year, and to pay back the face value of the loan on a specific date. Bonds can be issued by public authorities, credit institutions, companies, and supranational institutions in the primary markets. The most common process for issuing bonds is through underwriting, where one or more securities firms or banks buy the entire issue of bonds from the issuer and resell them to investors. Bonds are often liquid, meaning it is often fairly easy for an institution to sell a large quantity of bonds without affecting the price much.
Some key points to know about bonds include:
- Bonds can be issued by companies or governments and generally pay a stated interest rate.
- The market value of a bond changes over time as it becomes more or less attractive to potential buyers.
- Bonds that are higher-quality, meaning more likely to be paid on time, generally offer lower interest rates.
- Bonds that have shorter maturities, meaning a shorter length until full repayment, tend to offer lower interest rates.
Investors buy bonds because they provide a predictable income stream, typically pay interest twice a year, and if the bonds are held to maturity, bondholders get back the entire principal, so bonds are a way to preserve capital while investing. Companies, governments, and municipalities issue bonds to get money for various things, which may include general obligation bonds, which are not secured by any assets and are backed by the “full faith and credit” of the issuer, or revenue bonds, which are backed by revenues from a specific project or source.
