Bond

A bond is a fixed-income security that represents a loan made by an investor to a borrower, typically a corporation or government. When you buy a bond, you're essentially lending money to the issuer in exchange for regular interest payments (called coupon payments) and the return of your principal when the bond matures. Bonds have several key features. The face value (or par value) is the amount the issuer will pay back when the bond matures, typically $1,000 per bond. The coupon rate is the annual interest rate paid on the face value. The maturity date is when the principal is repaid. Bond prices fluctuate based on interest rates, credit quality, and time to maturity. There are many types of bonds. Government bonds, like U.S. Treasury securities, are considered among the safest investments because they're backed by the full faith and credit of the government. Corporate bonds offer higher yields but carry credit risk - the possibility that the company might default. Municipal bonds are issued by states and cities and often offer tax advantages. The relationship between bond prices and interest rates is inverse. When interest rates rise, existing bond prices fall because their fixed coupon payments become less attractive compared to new bonds issued at higher rates. Conversely, when rates fall, existing bond prices rise. This interest rate risk is a key consideration for bond investors. Credit risk is another important factor. Rating agencies like Moody's and S&P assign grades to bonds based on the issuer's creditworthiness. Investment-grade bonds (BBB or higher) are considered relatively safe, while high-yield or "junk" bonds (below BBB) offer higher returns but greater risk of default. Bonds play an important role in diversified portfolios. They typically provide steady income and are less volatile than stocks, helping to reduce overall portfolio risk. As investors approach retirement, many shift toward higher bond allocations to preserve capital and generate predictable income.