Investor Corner/The asset classes/Debt Concepts
2.2.1 What Is a Bond / Debt Instrument?
A bond is a loan. You lend money to a government or company, and in return you receive periodic interest plus your principal back at maturity, provided the borrower does not default along the way.
Lending, not owning
Buying a bond makes you a creditor, not an owner. This is the fundamental difference from equity. A shareholder's return depends on how well the business performs; a bondholder is promised a fixed schedule of payments regardless of whether the business does brilliantly or merely adequately, as long as it stays solvent enough to pay.
The three things every bond promises
Every bond specifies a face value, the amount repaid at maturity; a coupon, the stated interest rate paid periodically; and a maturity date, when the loan is due to be repaid in full. Between issue and maturity, the bond's market price can move up or down, but the coupon and face value written into the bond itself generally do not change.
Why bonds sit in most portfolios
Bonds typically offer more predictable income and lower volatility than equity, which is why they form the stabilising part of most portfolios. That stability is not free of risk, however. The two main risks, changes in interest rates and the possibility of default, are large enough topics that they each deserve separate treatment.
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