Bonds: An Introduction to Borrowing Relationships and Ways of Earning Returns
A bond is a debt instrument issued by a government or company to raise funds. When investors purchase bonds, they are effectively lending money to the issuer and receive interest as agreed, with the principal repaid at maturity. Bonds are generally more stable than stocks, but they are still affected by factors such as interest rates, maturity, and the issuer’s ability to repay.
How bonds work
A bond can be understood as a formal loan certificate. The issuer obtains funds by selling bonds, while investors become creditors. Bonds generally specify a par value, coupon rate, and maturity date: the par value determines the amount repaid at maturity, the coupon rate determines the interest, and the maturity date indicates when the principal will be returned. After issuance, some bonds can also be traded on the secondary market.
Interest, maturities, and main types
For example, a fixed-rate bond with a par value of 1,000 USD, and a coupon rate of 5%would pay annual interest of 50 USD as agreed; whether the principal and interest are received on time still depends on the issuer’s performance of its obligations. Bonds can be classified by maturity or issuer. Common issuers include governments, local governments, and companies.
Differences in interest payments on U.S. Treasuries
U.S. Treasury bills have maturities of no more than 1 years and are typically issued at a discount, with no regular interest payments; returns come from the difference between the purchase price and the par value at maturity. Treasury notes have maturities of 2、3、5、7 and 10 years, while Treasury bonds have maturities of 20 or 30 years and typically pay interest every 6 months. The cash flow arrangements of different instruments should not be conflated.
Stable returns do not mean no risk
Bonds are often used to obtain relatively stable interest income and help diversify portfolio risk, but their market prices can still change. Generally, when market interest rates rise, existing bonds become less attractive because their coupon rates are lower, and their prices tend to fall; when interest rates decline, prices may rise. Whether they are suitable to hold depends on an assessment of personal goals, risk tolerance, and market conditions.
Original Tutorial
https://www.binance.com/zh-CN/academy/glossary/bond