Investing basics
A bond is a tradable loan to a government, company or other issuer. The issuer promises specified payments, but the value and reliability of those promises can change.
Make it click
Imagine lending money under a written timetable: interest is due on stated dates and the principal is due at maturity. The timetable is clear, while the borrower's ability to honour it is not certain.
Now put that into markets
A bond turns that IOU into a security that may trade before maturity. Its market price moves when interest rates, inflation, credit quality, liquidity or the time remaining to repayment changes.
Most bonds specify a face value, maturity date and coupon, although structures vary. If market yields rise, an existing fixed coupon normally becomes less attractive and its price tends to fall, all else equal.
Separate coupon from yield. Coupon describes contracted cash payments relative to face value; yield relates those payments and repayment to the price an investor pays now.
Scheduled payments are not the same as risk-free payments. Issuers can default, inflation can erode purchasing power and selling before maturity can realise a gain or loss.
Takeaway
