What is a bond and how does it work?

A bond is a financial instrument that represents a loan made by an investor to an issuer, typically a government or corporation. When you buy a bond, you are essentially lending money to the issuer in exchange for a promise of repayment of the principal (the amount you invested) plus interest at a future date.

Bonds can be bought and sold on financial markets, and the value of a bond can fluctuate depending on changes in interest rates, creditworthiness of the issuer, and other market conditions. Generally, when interest rates rise, the value of existing bonds goes down, and when interest rates fall, the value of existing bonds goes up.

Bonds come in different types, with different maturities, interest rates, and levels of risk. Some bonds have a fixed interest rate that is paid regularly until the bond matures, while others have variable rates that adjust based on market conditions. Bonds with longer maturities typically offer higher interest rates but are also riskier than bonds with shorter maturities.

Overall, bonds can provide a reliable source of income for investors, but it’s important to understand the risks and benefits of different types of bonds before investing.