Bond

A bond is a long-term debt instrument or borrowing arrangement in which the borrower issues (sells) an IOU to the investor.

A fixed-income security is a claim on a specified periodic stream of income. Fixed-income securities have the advantage of being relatively easy to understand because the level of payments is fixed in advance such as semiannually or annually. Risk considerations are minimal if the issuer of the bond is sufficiently creditworthy. That makes these securities a safety investment vehicles for all the investor. The bond is the basic fixed-income security.

A bond is a long-term promissory note issued by a business or government unit, or borrowing arrangement in which the borrower issues (sells) an IOU to the investor. The arrangement obligates the issuer to make specified payments to the bondholder on specified dates. A typical coupon bond obligates the issuer to make semiannual payments of interest, called coupon payments, to the bondholder for the life of the bond, and then to pay in addition the bond's par value (equivalently, face value) at the bond's maturity date. The coupon rate of the bond is the coupon payment divided by the bond's par value.

To illustrate, a bond with par value of $1,000 and coupon rate of 8% might be sold to a buyer for $1,000. The bondholder is then entitled to a payment of 8% of $1,000, or $80 per year, for the stated life of the bond, say 30 years. The $80 payment typically comes in two semiannual installments of  $40 each. At the end of the 30-year life of the bond, the issuer also pays the $1,000 par value to the bondholder.