A loan that can be traded and which is repaid at the maturity of the bond. The upside on bonds is limited which is why bonds are sometimes called “fixed income”. A bond has a finite life and ultimately you will get your money back, unlike a share which never matures. The entity borrowing money by issuing the bond is called the issuer, this can be a government (government bond), or a company (corporate bond). Bond owners receive periodic payments called coupons and this income is what draws investors to the asset class.
Bond payments must always be repaid, unlike dividends on shares. If a coupon payment is missed this is called a default and it can lead to bankruptcy of the company. Credit rating agencies such as Moody’s, Standard and Poors and Fitch are paid by issuers to rate their bonds according to their risk of default. Investors can either buy bonds on their day of issue, which is called buying in the primary market, or from another investor after the bond issued in the secondary market. The secondary market can be very illiquid for some corporate bonds, which means that it can be difficult and time-consuming to find a buyer or seller for a bond. PensionCraft offer a step by step course all about Everything You Need to Know About Bond Funds suitable for beginners.