Bond

When a government or company needs to borrow large sums, it can issue bonds to many investors instead of borrowing from a single bank. Each bond has a face value, often 1,000, a coupon rate that sets the interest paid and a maturity date when the face value is repaid.

For example, a 1,000 bond with a 5% coupon maturing in ten years pays 50 of interest each year for ten years, then repays the 1,000 at the end.

Bonds can be bought and sold before maturity, so their prices change. When market interest rates rise, existing bonds with lower coupons become less attractive and their prices fall. When rates fall, existing bonds become more valuable and their prices rise.

Bonds are generally less risky than shares, because bondholders are paid before shareholders and receive fixed payments. But they are not risk-free. The issuer might default, rising interest rates can reduce prices and inflation can erode the real value of fixed payments. Bonds issued by stable governments are usually safer than those issued by companies with weaker finances.