Bond
A bond is a fixed-income debt security where the issuer owes the holder a debt and pays interest (coupon) plus principal at maturity.
Exam Tip
Inverse relationship: Interest rates UP = Bond prices DOWN
What is a Bond?
A bond is essentially an IOU. When you buy a bond, you're lending money to the issuer (government, corporation, or municipality) in exchange for regular interest payments and the return of principal at maturity.
Key Bond Terms
| Term | Definition |
|---|---|
| Par Value (Face Value) | Amount paid at maturity (usually $1,000) |
| Coupon Rate | Annual interest rate based on par value |
| Maturity Date | When principal is repaid |
| Yield | Actual return based on purchase price |
Types of Bonds
- Corporate Bonds - Issued by companies
- Municipal Bonds - Issued by state/local governments (often tax-exempt)
- Treasury Bonds - Issued by U.S. government
- Agency Bonds - Issued by government-sponsored entities
Bond Price and Interest Rate Relationship
Bond prices and interest rates move in opposite directions. When rates rise, bond prices fall. When rates fall, bond prices rise.
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Related Terms
Municipal Bond
SecuritiesA municipal bond (muni) is a debt security issued by a state, city, or county to finance public projects, with interest typically exempt from federal income tax.
Yield
SecuritiesYield is the income return on an investment, expressed as a percentage, including interest or dividends received.