What is a Bond?
A bond is a contractual promise of payments between a borrower and a lender. The lender provides an up-front payment to buy the bond, and the borrower (or issuer) promises to pay some combination of periodic interest payments and a return of the initial principal payment.
Traditionally, bonds are initially sold at face value, which can also be called the par, principal, stated or maturity value. This payment will be returned at some future date known as the maturity date, and periodic interest payments will be paid at a rate agreed upon (the stated or coupon rate) at the time of issue. Typically interest payments are made semi-annually.
Consider a $1,000 bond with a 20-year term and paying 6% interest. The lender would buy the bond for $1,000. Each six months the issuer would make an interest payment of $30 (half the annual interest rate). At the end of 20 years, the issuer would make the final interest payment and also return the $1,000 principal.
For more information, see all articles on: Fixed income investments, Investing in bonds See also:
The Intelligent Investor: The Classic Text on Value Investing
Financial Statement Analysis: A Practitioner's Guide, 3rd Edition
Managing Investment Portfolios: A Dynamic Process (CFA Institute Investment Series)
