What is a bond and how does it work?

A bond is a debt security issued by governments or corporations to raise capital. When an investor purchases a bond, they are essentially lending money to the issuer in exchange for regular interest payments (known as the coupon) and the promise to repay the principal amount at the bond’s maturity. Bonds are considered a lower-risk investment compared to stocks because they provide fixed income and the principal is generally returned at maturity. However, bonds are not entirely risk-free, as they are subject to interest rate fluctuations and the creditworthiness of the issuer.