bonds

A bond is a debt instrument issued by a borrower to raise capital. The issuer promises to pay the holder a fixed or variable interest rate over a specified period and to return the principal, or face value, at maturity. Bonds are traded in a secondary market, and their prices move with interest rates and credit risk.

Key features include face value (par), coupon rate, maturity date, and payment schedule. Most traditional bonds pay semiannual coupons based on the coupon rate. Prices may be above or below par, and the yield to maturity reflects the total return if held to maturity.

Types include government bonds (such as Treasury securities), municipal bonds issued by governments, corporate bonds issued by companies, and agency or supranational bonds. Special varieties include zero‑coupon bonds, floating-rate notes, and convertible bonds that can be exchanged for stock.

Valuation relies on the present value of future cash flows discounted at an appropriate discount rate. Prices fall when yields rise and rise when yields fall. Credit quality affects yield; higher-rated issuers pay lower yields. Risks include interest-rate risk, credit/default risk, reinvestment risk, and liquidity risk. Some bonds can be callable, adding call risk.

Bond investments are used for income, preservation of capital, and risk diversification. Governments issue bonds to fund spending; lenders include banks, funds, and individuals. Inflation-protected and tax-advantaged bonds exist in many markets.

Tax treatment varies by jurisdiction. Interest on many municipal bonds is exempt from federal income tax in the United States; other bonds are generally taxable. Rating agencies assess credit risk and publish bond ratings that influence borrowing costs.