What is a bond?
A bond is a debt security issued to investors. It may promise coupon payments and principal at maturity, subject to the issuer’s ability to pay.
Structure and price
1. Issuer and maturity Governments and companies issue bonds with specified currency, maturity, coupon and repayment terms. 2. Coupon versus yield Coupon is based on face value. Yield to maturity can differ when the purchase price differs from face value. 3. Rates and price Existing fixed-rate bond prices generally fall as market yields rise. Longer maturities can be more rate sensitive. 4. Selling early An investor who sells before maturity faces the prevailing market price and transaction costs.
Main risks
5. Default risk Issuers can miss payments. Rights and protections differ across bonds, even those from one company. 6. Other risks Inflation, currency movements and low trading volume can affect realized returns and liquidity. 7. Price example When new bonds pay more, an old fixed coupon can become less attractive, lowering its price. Credit risk can move prices independently.