A bond is very similar to an IOU or a loan that you offer a company or government entity that needs to borrow money for things like expansion projects or new programs. These organizations typically need more money than they can borrow from a bank, so they issue bonds as a way of raising the funds. The organization selling the bond is known as the issuer, and the individual who buys the bond is the investor.
As with any type of loan, there is an incentive given to the investor. In exchange for the use of the money that is used to buy the bond, the issuer makes interest payments to the investor. These payments are made at a rate and schedule that is pre-determined, and this interest rate is known as the coupon. The issuer has to pay back the face value of the bond, or the amount borrowed, on the maturity date.
Unlike stocks, bonds are considered fixed-income securities because the amount of money the investor will receive is known ahead of time. Though stocks typically offer a much higher return than bonds, bonds can still be a valuable part of an individual's overall investment portfolio, especially for those in retirement who are living on a fixed income or those who cannot afford to lose money in the short-term.
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