Bond

Definition:

A debt instrument that represents a loan between an investor and a borrower, typically a company (corporate bond) or government.

Example:

The pension fund invested in Coca-Cola corporate bonds.

More Information:

A bond has a fixed maturity, face value and interest rate. Every bond has the same face value – $1,000. If a company wants to raise $100 million through bonds, it has to sell 100,000 bonds.

Unlike a credit card or mortgage, bonds don’t receive principal payments over time. The bond is repaid in full at maturity. Bonds are typically issued with 5, 7, 10, 20 or 30 year maturities.

Bonds do, however, pay interest over the life of the bond. Interest payments are typically made semi-annually and are known as coupon payments.

A bond’s interest rate will be set based on what investors demand in exchange for holding the debt. This is somewhat influenced by the company’s credit rate, issued by an independent rating agency. Think of it like a corporate credit score. The more financially stable a company is, the higher the company’s credit rating, and the lower the interest it will pay.

The global bond market has tripled in size over the last 15 years and exceeds $100 trillion, with $40 trillion in the US alone (2x annual GDP).