Bond
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Join →What Is a Bond?
A bond is a debt instrument. When we buy a bond, we are generally lending money to an issuer such as a government, municipality, or company. In return, the issuer promises payments according to the bond’s terms and repayment of principal at maturity, subject to the issuer’s ability to meet its obligations.
Key Characteristics
- Issuer: the entity borrowing the money.
- Principal/face value: the amount referenced by the bond terms.
- Coupon: the contractual interest payment, when applicable.
- Maturity: the date when principal is scheduled to be repaid.
- Credit risk: the issuer may fail to meet its obligations.
Bond prices and yields are closely related. In general, when market yields rise, existing fixed-coupon bond prices tend to fall, and when yields fall, those prices tend to rise. The relationship is not the same as a stock price movement and will be examined in greater depth later.
Key Terms
Bond, issuer, principal, face value, coupon, maturity, yield, credit risk.
Knowledge Check
- What type of instrument is a bond?
- Who is the borrower in a bond transaction?
- What is the general relationship between market yields and existing fixed-coupon bond prices?