Bond

A bond is a loan in the form of a tradable security. When a government, municipality, or company wants to borrow money, it can issue bonds instead of going to a bank. Investors who buy the bond are effectively lending money to the issuer, and in return the issuer promises to pay interest at regular intervals and to return the original loan amount at a set future date.

The mechanics have a few standard pieces of vocabulary. The "face value" or "par value" is the amount the issuer will repay at the end. The "coupon" is the interest rate the issuer pays, usually as a percentage of face value, on a fixed schedule (often twice a year). The "maturity date" is when the loan ends and the face value is repaid. Between issuance and maturity, the bond itself can be bought and sold in the market, and its price moves based on interest rates, the issuer's perceived ability to repay (credit risk), and how much time is left until maturity.

The nuance that trips people up is that a bond's price and its yield move in opposite directions. If interest rates in the broader market rise after a bond is issued, that bond's fixed coupon becomes less attractive compared to newer bonds, so its price falls to compensate buyers with a higher effective yield. The coupon rate printed on the bond never changes, but the yield an investor actually earns if they buy at a different price than face value does change.

Bond is also used loosely as a stand-in for "fixed income security" in general, covering everything from short-term government bills to long-term corporate debt, though technically shorter-dated instruments are sometimes called notes or bills rather than bonds.