Bond
A debt instrument in which the issuer borrows money from the buyer and promises to pay periodic interest plus return the principal at maturity.
A bond is a fixed-income security representing a loan from the investor to the issuer — a government, municipality, or corporation. The issuer promises to pay coupon interest at set intervals and return the face value (principal) when the bond matures.
Bond prices move inversely with yields: when market interest rates rise, existing bonds paying lower coupons become less attractive, so their prices fall. When rates fall, existing bonds are more valuable.
For equity traders, the bond market is the gravity field that pulls on valuations — higher yields raise the discount rate used to price future cash flows, compressing equity multiples.
Example
You buy a 10-year Treasury bond with a $1,000 face value and a 4.5% coupon. Each year you receive $45 in interest. At maturity in 10 years, you receive $1,000 back regardless of what interest rates did in between.
Related Terms
Accrued Interest
The coupon interest earned on a bond since the last payment date, owed by the buyer to the seller when a bond is purchased between coupon dates.
IntermediateBond Yield
The return an investor earns by holding a bond — driven by its price, coupon, and time to maturity. Moves inversely with price.
BeginnerCorporate Bond
Debt issued by a company to raise capital, paying a coupon above Treasuries to compensate investors for credit risk.
BeginnerCoupon
The fixed annual interest payment made by a bond issuer to the bondholder, expressed as a percentage of face value.
BeginnerDefault Risk
The probability that a bond issuer will fail to make scheduled interest or principal payments — the core credit risk in fixed income.
IntermediateFace Value (Par)
The nominal value of a bond that the issuer promises to repay at maturity — typically $1,000 for U.S. bonds.
BeginnerHigh-Yield Bond
Bonds rated below investment grade (BB+/Ba1 or lower) — offering higher yields to compensate for elevated default risk.
IntermediateInvestment Grade
Bonds rated BBB-/Baa3 or above by major rating agencies — considered low enough default risk for institutional investors and pension funds.
IntermediateMaturity
The date on which a bond's principal must be fully repaid to the bondholder, ending the life of the debt instrument.
BeginnerMortgage-Backed Security (MBS)
A bond backed by a pool of home mortgages, passing borrower payments through to investors — and a key target of Fed QE.
AdvancedMunicipal Bond
Debt issued by U.S. states and local governments, whose interest is typically exempt from federal (and sometimes state) income tax.
IntermediatePrice-Yield Inverse Relationship
The fundamental bond market law: when yields rise, bond prices fall; when yields fall, bond prices rise — always and mechanically.
BeginnerSecurity
A tradable financial instrument — stocks, bonds, options, and ETFs are all securities. If it trades on an exchange, it is a security.
BeginnerYield
The income generated by an investment expressed as a percentage of its price. Used for bonds, dividends, and savings.
BeginnerYield to Maturity
The total annualized return an investor earns if they hold a bond to maturity — accounting for coupon payments, price paid, and time remaining.
Intermediate