A bond is a loan. When you buy one, you’re lending money to whoever issued it — a government or a company — and in return they promise to pay you interest along the way and return your money on a set date.
Lending, not owning
This is the key contrast with stocks. A share makes you a part-owner (equity); a bond makes you a lender (debt). As a lender:
- You don’t own a piece of the business or share in its profits.
- You’re promised fixed payments — interest, then your money back — regardless of how well the issuer does.
- You rank ahead of shareholders if things go wrong: lenders get paid before owners.
You trade upside for predictability. A stock can soar; a bond just pays what it promised.
The pieces every bond has
- Issuer — who’s borrowing (a government, a company).
- Face value (or par value) — the amount repaid at the end, often $1,000.
- Coupon — the interest the bond pays, usually a fixed annual rate of the face value.
- Maturity — the date the face value is repaid and the coupons stop.
Example: a $1,000 bond with a 4% coupon and a 10-year maturity pays you $40 a year for 10 years, then returns your $1,000.
Who issues bonds, and why
Governments and companies issue bonds to raise money — to fund spending, projects, or growth — by borrowing from investors instead of (or alongside) banks. You, the buyer, become one of many lenders.
The takeaway
A bond is debt: you lend money to an issuer who pays you coupons and repays the face value at maturity. You give up the ownership upside of a stock in exchange for steady, promised payments — the heart of “fixed income”.