What is a bond?

A bond is defined as a fixed-income investment that represents a loan made by an investor to a borrower, typically a government or corporation. When an investor purchases a bond, they are essentially lending money to the issuer, who then agrees to pay back the principal amount along with interest at specified intervals until the bond matures. This makes bonds a popular investment choice for those seeking stable income through interest payments, as they are generally less risky compared to stocks.

The characteristics of bonds set them apart from other financial instruments. For instance, they do not represent ownership in a company, as stocks do. Instead, they function as a debt security. This distinction emphasizes the nature of bonds as loans rather than equity stakes. In addition, bonds usually come with fixed interest rates, providing predictable returns, which is a key feature desired by many conservative investors.

Overall, understanding bonds as fixed-income investments is crucial for anyone studying finance or planning their financial future, as they play a significant role in wealth-building and portfolio diversification.