Bond

Investments

Quick Definition

A Bond is a fixed-income financial instrument where an investor lends money to a government or company in exchange for periodic interest payments and return of the principal at maturity.

Detailed Explanation

A Bond is essentially a loan given by investors to issuers such as governments or corporations. In return, the issuer agrees to pay regular interest (called coupon) and repay the principal amount (face value) on a specified date (maturity).

Key Components of a Bond

  • Face Value (Par Value): Amount repaid at maturity
  • Coupon Rate: Interest rate paid to investors
  • Maturity Date: Date when principal is returned
  • Issuer: Government or company issuing the bond

Types of Bonds

  • Government Bonds: Issued by the government (low risk)
  • Corporate Bonds: Issued by companies (higher return, higher risk)
  • Zero-Coupon Bonds: No periodic interest, issued at a discount
  • Convertible Bonds: Can be converted into shares

Benefits

  • Provides regular income
  • Lower risk compared to equities (especially government bonds)
  • Useful for portfolio diversification

Risks

  • Interest rate risk (bond prices fall when rates rise)
  • Credit risk (issuer may default)

Bonds are widely used by investors seeking stable and predictable returns.

Example

"An investor buys a ₹1,000 bond with a 7% coupon rate for 5 years. They receive ₹70 annually and get ₹1,000 back at maturity."

← Back to Financial Dictionary