What is a Bond?

A bond is a fixed obligation to pay that is issued by a corporation or government entity to investors. Bonds are used to raise cash for operational or infrastructure projects. Bonds usually include a periodic coupon payment, and are paid off as of a specific maturity date. There are a number of additional features that a bond may have, such as being convertible into the stock of the issuer, or callable prior to its maturity date.

When a bond is issued, the issuing entity is the borrower, while the investor who buys it is acting in the role of a lender.

Characteristics of a Bond

Here are the key characteristics of a bond:

Face value. This is the nominal value of a bond, typically $1,000, which is paid back to the bondholder at maturity. It is the basis for any interest payments made by the issuer.
Coupon rate. This is the interest rate that the issuer agrees to pay annually or semi-annually on the face value. It is expressed as a percentage.
Callability. Some bonds have a call feature, which means that the issuer can repay investors before the maturity date, often to refinance at lower interest rates.
Maturity date. This is the date when the bond’s principal (face value) is repaid to the bondholder.
Issuer. This is the entity that issues the bond, such as a corporation, municipality, or government.

The Difference Between a Registered Bond and a Coupon Bond

A bond may be registered, which means that the issuer maintains a list of owners of each bond. The issuer then periodically sends interest payments, as well as the final principal payment, to the investor of record. It may also be a coupon bond, for which the issuer does not maintain a standard list of bond holders. Instead, each bond contains interest coupons that the bond holders send to the issuer on the dates when interest payments are due. The coupon bond is more easily transferable between investors.