Starting out
Bond
A loan you make to a government or company, which pays you interest and returns your money on a set date.
How it works
When you buy a bond you are the lender. The borrower promises to pay a fixed amount of interest — the coupon — usually twice a year, and to repay the face value on the maturity date.
Because the payments are contractual rather than discretionary, bonds are more predictable than shares. That predictability is what you buy, and the lower long-run return is the price you pay for it. Bondholders also sit ahead of shareholders if the borrower fails.
Where it misleads people
People call bonds "safe" without saying safe from what. A government bond is close to safe from default and not at all safe from inflation or from rising interest rates, either of which can lose you real money while every promised payment arrives on time.
Worked example
A $1,000 bond with a 4% coupon maturing in 2031 pays $40 a year, split into two $20 payments, and repays the $1,000 in 2031 — regardless of what the bond is worth in the market meanwhile.
Related terms
- CouponThe fixed interest a bond pays each year, expressed as a percentage of its face value.
- Yield to maturityThe total annual return from holding a bond to maturity, counting coupons and any price gain or loss.
- DurationHow much a bond’s price moves when interest rates change, expressed in years.
- Credit ratingAn agency’s assessment of how likely a borrower is to repay, on a lettered scale.
- Face valueThe amount a bond repays at maturity, and the amount its coupon is calculated on.
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Educational reference only. Nothing here is investment advice or a recommendation to buy or sell anything, and tax treatment depends on your own circumstances and the country you are in.