What is Bond?

A bond is a loan you make to a company or government. They promise to pay you back with regular interest plus the original amount at maturity. The borrower uses the funds to finance projects or operations, promising to pay the investor a fixed rate of interest (known as the coupon rate) periodically and to return the principal (the face value or par value) at maturity.

Bonds are categorized based on the issuing entity. US Treasury bonds are backed by the full faith and credit of the federal government, representing low default risk. Municipal bonds are issued by states or local governments and are often tax-exempt. Corporate bonds are issued by private companies, offering higher interest rates in exchange for higher default risk.

Bond prices and interest rates are inversely related. When market interest rates rise, existing bond prices fall, as new bonds offer higher yields. Conversely, when rates fall, bond prices rise. Lenders evaluate credit risk using ratings from agencies like Moody's or S&P.