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BasicsLevel 1Beginner7 minUpdated What is a bond?
Bond investing feels abstract to many people, but the core is everyday stuff: you lend money and get paid for it.
- What buying a bond means in practice
- What the coupon, face value and maturity date mean
- Why a government bond yields less than a corporate bond
You lend money, you get interest
When you buy a bond, you lend money to a government or a company and in return you get interest and your capital back on the maturity date.
A government or a company issues a bond to raise funding. As the buyer, you receive a regular coupon throughout the life of the bond and get the face value back on the maturity date. Unlike a shareholder, you don't own any part of the company. You are a creditor, and you get your money before the owners.
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Interest is the sum of two things
The less certain the borrower is to repay, the higher the interest you demand. That is why a government bond yields less than a corporate bond. Interest is always the sum of two things:
A creditor, not an owner
This difference decides both the return and the risk. As a creditor, you know in advance what you are promised: the coupon and your capital back. There are no upside surprises: even if the company grew its profit tenfold, you would still get only the agreed interest.
This content is for information purposes only and should not be construed as investment advice or a recommendation. Investing always involves the risk of losing capital. The value of financial instruments and investments can go up or down, and past performance is no guarantee of future returns.
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