What is a bonds?

A bond represents a promise by a borrower to pay a lender their principal and usually interest on a loan.

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How do bonds work?

When companies or other entities need to raise money to finance new projects, maintain ongoing operations, or refinance existing debts, they may issue bonds directly to investors. The borrower (issuer) issues a bond that includes the terms of the loan, interest payments that will be made, and the time at which the loaned funds (bond principal) must be paid back (maturity date).

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​Who issues Bonds?

Governments (at all levels) and corporations commonly use bonds in order to borrow money. Governments need to fund roads, schools, dams, or other infrastructure. The sudden expense of war may also demand the need to raise funds.

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​Who issues Bonds?

Similarly, corporations will often borrow to grow their business, to buy property and equipment, to undertake profitable projects, for research and development, or to hire employees. The problem that large organizations run into is that they typically need far more money than the average bank can provide.​

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Categories of Bonds​

• Corporate bonds are issued by companies. Companies issue bonds rather than seek bank loans for debt financing in many cases because bond markets offer more favorable terms and lower interest rates.

• Municipal bonds are issued by states and municipalities. Some municipal bonds offer tax-free coupon income for investors.​

Categories of Bonds

• Government bonds such as those issued by the U.S. Treasury. Bonds issued by the Treasury with a year or less to maturity are called “Bills”; bonds issued with 1–10 years to maturity are called “notes”; and bonds issued with more than 10 years to maturity are called “bonds.” The entire category of bonds issued by a government treasury is often collectively referred to as "treasuries." Government bonds issued by national governments may be referred to as sovereign debt.

• Agency bonds are those issued by government-affiliated organizations such as Fannie Mae or Freddie Mac​

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​Characteristics of Bonds

• Face value is the money amount the bond will be worth at maturity; it is also the reference amount the bond issuer uses when calculating interest payments. For example, say an investor purchases a bond at a premium of $1,090, and another investor buys the same bond later when it is trading at a discount for $980. When the bond matures, both investors will receive the $1,000 face value of the bond.​

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​Characteristics of bonds

• The coupon rate is the rate of interest the bond issuer will pay on the face value of the bond, expressed as a percentage.1

  For example, a 5% coupon rate means that bondholders will receive 5% x $1000 face value = $50 every year.

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​Characteristics of Bonds

• The maturity date is the date on which the bond will mature and the bond issuer will pay the bondholder the face value of the bond.

• The issue price is the price at which the bond issuer originally sells the bonds.

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​Advantages of Bonds

• Receive payment through interest rates.

• Hold the bond until maturity and get back all your principal.

• Profit if you sell the bond at a higher price.​

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​Disadvantages of Bonds

• Bonds pay out lower​ returns than stocks.

• ​Companies can default on bonds

• ​Bond Yields can fall

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