Bond
A loan made to a government, agency or company, packaged so it can be transferred to somebody else. It obliges the issuer to pay stated interest on stated dates and to repay a stated sum at maturity.
Example
A 5-year bond with a 4% coupon and a par value of 1,000 obliges its issuer to pay 40 a year for five years and 1,000 at the end.
Important
The holder is a creditor, not an owner. That means the upside is capped at the schedule however well the issuer does, and the claim ranks ahead of every shareholder if it does badly.
Related terms
- Par value — The sum the issuer repays at maturity, per unit of the bond. Also called face value or principal. It is the base on which the coupon percentage is calculated.
- Coupon — The periodic interest a bond pays, quoted as a percentage of par value rather than of the price. It is fixed by the contract at issue and does not change with the market.
- Maturity — The date on which a bond repays its par value and the contract ends. Bonds are commonly grouped as short, intermediate or long by how far away that date is.
- Issuer — The borrower on the other side of a bond - a sovereign government, a state or municipality, a government agency or a company. The issuer owes the coupons and the par value.
- Creditor — Someone who has lent money and is owed repayment, ranked ahead of equity holders if the borrower runs into trouble.
- Debt — Money lent that must be repaid with interest, regardless of how the borrower's business or asset performs.
Lessons that explain it
All 578 terms in the Investing glossary