Pillinger Works

Bond

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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

  1. What type of instrument is a bond?
  2. Who is the borrower in a bond transaction?
  3. What is the general relationship between market yields and existing fixed-coupon bond prices?