How debt securities allow governments and companies to borrow capital from the public, paying fixed interest until maturity.
What is a bond?
A bond is a debt security issued by a government or corporation to raise capital from investors. In plain terms, a bond is a formal IOU: when you buy a bond, you are lending money to the issuer in exchange for regular interest payments and the full return of your principal on a set date.
Anatomy of a bond
Every bond is defined by three core characteristics:
- Face value (Par value) — The nominal amount the issuer borrows and promises to pay back when the bond matures (for example, ₹1,000 or $1,000).
- Coupon rate — The annual interest rate paid by the issuer, usually distributed semi-annually or annually. A 6% coupon on a ₹1,000 bond pays ₹60 each year.
- Maturity date — The specific future date when the loan ends and the issuer repays the full principal face value to the bondholder.
The bond seesaw: prices and yields
Bonds can be bought and sold on secondary markets before they mature. When prevailing market interest rates change, existing bond prices move in the opposite direction, like a seesaw:
If current interest rates rise to 8%, nobody will pay full price for an existing bond paying only 6%. To attract buyers, the price of that 6% bond must drop until its effective yield matches current market rates. Conversely, when interest rates drop, older higher-paying bonds trade at a premium.
Stocks versus bonds
Stocks and bonds represent two halves of capital markets:
- Stocks are equity — You own a piece of the company. Returns are unpredictable, but potential upside is unlimited.
- Bonds are debt — You are a creditor. Returns are contractually fixed, and bondholders have legal priority over stockholders if the issuer defaults.
Ai disclosure: written with the help of AI (ChatGPT). You are encouraged to point out errors and omissions.
