A bond is a debt security,like an IOU.Borrowers issue bonds to raise money from investors willing to lend them money for a certain amount of time.
When you buy a bond,you are lending to the issuer,which may be a government,municipality,or corporation.In return,the issuer promises to pay you a specified rate of interest during the life of the bond and to repay the principal,also known as face value or par value of the bond,when it"matures,"or comes due after a set period of time.
Why are bonds bought and sold?
Investors buy bonds because:
They provide a predictable income stream.Typically,bonds pay interest on a regular schedule,such as every six months.
If the bonds are held to maturity,bondholders get back the entire principal,so bonds are a way to preserve capital while investing.
Bonds can help offset exposure to more volatile stock holdings.
Companies,governments and municipalities issue bonds to get money for various things,which may include:
Providing operating cash flow
Financing debt
Funding capital investments in schools,highways,hospitals,and other projects