bond

When a company or a government needs to borrow a large sum, it often does not go to a single bank. Instead it sells an IOU to many lenders at once. A bond is exactly that: a tradable IOU. By buying a bond you are lending money to the issuer, who promises to pay you regular interest for a set time and then return the original amount on a fixed date. You become a lender, not an owner.

Three numbers define a plain bond. The face value (or par) is the amount repaid at the end — say $1,000. The coupon is the fixed interest paid along the way — say 5% of face value, or $50 a year. The maturity is the date the face value is repaid — say in ten years. So this bond pays you $50 every year for ten years, then $1,000 at the end. Because a bond is a promise to pay set amounts, it is called a fixed-income security. Crucially, once issued, a bond can be bought and sold in the market, so its price can move away from its face value depending on interest rates and on how likely the issuer is to repay.

Bonds are how governments fund deficits and how large firms borrow cheaply over long horizons, and together they form one of the biggest markets on Earth — bigger than the stock market. For savers, bonds offer steadier, more predictable returns than shares, which is why they anchor cautious portfolios and pension funds. But bonds are not risk-free: the issuer can default (fail to pay), inflation can erode the fixed payments, and if market interest rates rise, the price of existing bonds falls. The most reliable government bonds are treated as the benchmark 'safe' asset against which everything else is measured.