Bond
A bond is a loan an investor makes to a government or company, which promises to pay interest over a set period and repay the principal at maturity.
When you buy a bond, you become a lender. The issuer, such as the US Treasury, a city or a corporation, agrees to pay interest, called the coupon, usually twice a year, and to return the bond's face value (often $1,000) on the maturity date.
Bonds can be bought when first issued or traded afterward in the secondary market, where prices change. Bond prices move opposite to interest rates: when rates rise, existing bonds with lower coupons become less attractive and their prices fall, and vice versa.
Key risks include interest rate risk, credit risk (the issuer may default) and inflation risk (fixed payments lose purchasing power). Credit ratings, maturity and duration help investors compare these risks. Many investors hold bonds through bond funds or ETFs to diversify a stock-heavy portfolio and generate income.
Example: a 10-year $1,000 bond with a 4% coupon pays $40 a year in interest and returns $1,000 at the end of year ten.