A bond is essentially a loan made by an investor to a borrower, typically a government or corporation. When you buy a bond, you're lending money to the issuer, who agrees to pay you back the principal amount (the original loan amount) at a specified maturity date, along with periodic interest payments.

Bond key Terms:

• Face Value: The amount the bondholder will receive at maturity.  
• Coupon Rate: The annual interest rate paid on the bond's face value.  
• Maturity Date: The date when the bond matures and the principal is repaid.  
• Yield: The annual rate of return on a bond, considering its purchase price and interest payments.
• Liquidity: Bonds can be bought and sold on the open market, providing liquidity to the bondholders.

How Bonds Work:

• Issuance: The issuer (government or corporation) sells bonds to raise capital.  
• Investment: Investors purchase these bonds, lending money to the issuer.  
• Interest Payments: The issuer pays periodic interest payments (coupons) to the bondholders.  
• Maturity: At the bond's maturity date, the issuer repays the principal amount to the bondholders.

Why Invest in Bonds?

• Regular Income: Bonds provide a steady income stream through periodic interest payments.  
• Lower Risk: Compared to stocks, bonds are generally considered less risky.  
• Diversification: Bonds can help diversify your investment portfolio.

Here is an example:

Imagine a company that wants to buy a new property because that property can generate good rental income and it can grow in value. The company doesn't want to finance this property from a bank loan but it would like to borrow money in some other way. It can issue 10-year bonds with a face value of 1,000€ and a coupon rate of 4%. Individual that buys this bond will earn 400€ over 10 year period, 40€ annually, and he will get back 1,000€ that he initially paid for that bond.