A bond is a specific class of debt instrument. Large corporate entities or public authorities may choose to issue a bond in order to secure large amounts of finance in order to facilitate desired projects or developments.
Investors who agree to buy into a bond, enter into an agreement to loan the desired about of money to the issuer for a fixed duration. The issuer then agrees to pay the face value of the bond back to their investors, on a specific date (maturity date) and to distribute periodic interest payments.
Most bonds have a fixed interest rate, which means that the investor knows the duration of the bond and the amount of interest they are to receive in advance. This interest payment known as the coupon rate of a bond.
Both parties may also agree to cooperate by issuing and financing a variable interest rate bond. The interest received by investors generally tends to change to reflect the market’s interest rate or other features decided when the bond is issued. For some bonds, both parties may decide in advance that the interest will be paid all at once, when the bond reaches maturity. An agreement such as this means that the bond is then a zero coupon bond.
Bonds are generally considered to be a safer investment vehicle when compared to stocks, for example. If an investor wishes to put their money into an ‘investment grade’ bond, the risk of a loss on investment is generally small.
Corporate bond coupon payments are also considered to be more stable than company dividend payments. However, bonds are also subject to a number of risks such as call and prepayment risk, credit risk, reinvestment risk, liquidity risk, etc.
Bonds are usually traded through brokers and are part of a financial instrument group called Fixed Income.