Bond Foundations · Bonds Explained
Begin with the contract
A bond is a debt security. The issuer borrows money and agrees to make payments under stated terms. Buying an ordinary corporate bond makes you a creditor, not a part owner of the business. The contract identifies the borrower, payment currency, interest terms and repayment date.
The word fixed in fixed income describes some contractual cash flows. It does not mean that the market value, purchasing power or final investment outcome is fixed. Some bonds have variable coupons or repayment features that require a different analysis.
Follow the money
Imagine a newly issued bond with $2,000 face value, a 4% annual coupon and three years until maturity. It pays once a year. If every payment arrives as promised, you receive $80 after the first year, $80 after the second and $2,080 after the third. These are hypothetical cash flows before tax and costs.
The final $2,000 is repayment of principal, not profit. Buying for $2,000 and receiving $2,240 in total produces $240 of nominal coupon income. The timing of those receipts matters when comparing this bond with another investment.
Distinguish issuance from resale
When you buy at issuance, your money helps fund the borrower. When you purchase an existing bond from another investor, the seller receives your payment. The issuer still owes the contractual cash flows to the eligible holder.
A quoted price can move even when the coupon stays the same. A buyer who pays above face value receives the same contractual principal as someone who paid less, assuming the bond has no special adjustment feature.
Build your first bond record
Write down five items before considering a return figure: the legal issuer, currency, face value, payment schedule and maturity. Then identify whether early redemption is permitted and where the repayment money should come from. Missing terms are a reason to investigate, not an invitation to assume the best outcome.
Try it yourself
A bond has $3,000 face value and pays a 5% annual coupon. How much interest is scheduled each year, and is principal repayment part of that interest?
Show the worked answer
Scheduled annual interest is $150. Repayment of the $3,000 principal is separate. Both depend on the issuer meeting its obligations.
Further reading
Educational material. Examples are hypothetical and do not recommend a security or a personal allocation. Contract terms and market conventions vary.
