Bonds
Definition
Bonds are a form of long-term financing in which an investor loans money to an entity (corporate or governmental) that borrows the funds for a defined period of time at a fixed interest rate. Bonds are used by companies, municipalities, states, and sovereign governments to finance projects and operations.
Analogy
Imagine you're lending your favorite book to a friend, and they promise to return it after a month with some extra pages of notes beneficial for your studies. In this scenario, your book is the bond you issued; your friend is the bondholder who receives benefits (interest) until they return your book (principal) at the agreed time.
Related terms
Interest Rate: The percentage charged on the total amount borrowed or paid as a reward for investment, essentially the cost of borrowing money or the return on invested funds.
Principal: This refers to the original sum of money borrowed in a loan or invested, which does not include interest or earnings.
Maturity: The fixed date in the future when the principal amount of a bond is scheduled to be repaid to investors and the bond's life ends
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