Bond

A bond is a predictable and structured repayment plan where the issuer receives an investment for a specified time in exchange for yield. Bonds generally mature after a term of five, ten, or twenty-five years and hold fixed interest rates. Every bond has several defining characteristics.

• Issue Price. The initial price paid by an investor for a particular bond.
• Face Value. The value of the bond at its maturity date.
• Maturity. The maturity of a bond is the lifespan of the bond. When a bond reaches maturity, it is redeemable for face value, and it no longer accrues interest payments.
• Interest Rate. A bond’s interest rate, also called the bond coupon rate, is the rate of interest specified when a bond is issued. Interest is paid periodically until the bond reaches maturity.
• Yield. The bond yield is the cumulative interest expected to be paid on a bond from the present until it reaches maturity.

A treasury bond is government security, which matures over a period of months or years. The yield on a three-month U.S. treasury bond is often referred to as the risk free rate.

A company may issue a corporate bond to investors. Corporate bonds are regulated by the Securities and Exchange Commission (SEC) and may offer fixed or variable interest rates. Companies may wish to use that bond to raise capital, rather than taking a higher interest rate loan from a bank. Accordingly, corporate bonds carry higher interest rates and more risk than treasury bonds.

Although bonds are generally considered to be safe investments, inflation makes them less profitable.

Bonds take months or years to reach maturity. As bond prices increase, yields fall, making them a less attractive potential investment.