Eli5 – what is a bond? Like the investment type of bond, not the spy type of bond…
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A bond is an investment and is a form of debt rather than equity. Equity being a stock of a company that you partially own.
The bond will pay you interest payments twice per year in the amount of the interest rate associated with it and after the term of the bond, you get your principal back.
It is essentially a loan you are supplying to the entity. Bonds are historically less volatile than stocks as well
Bonds – also known as fixed income instruments – are used by governments or companies to raise money by borrowing from investors. Bonds are typically issued to raise funds for specific projects. In return, the bond issuer promises to pay back the investment, with interest, over a certain period of time.
This is a good explanation and all details here.
https://www.blackrock.com/us/individual/education/how-to-invest-in-bonds#:~:text=Bonds%20%E2%80%93%20also%20known%20as%20fixed,a%20certain%20period%20of%20time.
A company or government needs money – an investment – to buy whatever it needs immediately to function, hopefully to build its economy so that it will *have* money later. There are a couple ways to acquire that money. Companies can sell stock, which is partial ownership of the company. When the company reports profits, the holder of the stock gets a percentage of those profits (dividends). How much someone is willing to pay for stock *now* depends on how much they expect to make in dividends later.
This presents a problem for the company, which is that if they make more money, they owe more money, because the stock is a percentage. And, the stock doesn’t go away – every year, the company must pay dividends from reported profits to that stockholder.
Instead, they can offer a bond, which says that you pay $X now, and when the bond “matures” you will receive $Y as a one-time payment. The maturity is a set number, like 5 years or 10 years or 20 years. This is also a primary way that governments get money because they can’t sell partial ownership like a company. Because it’s a one-time payment, the bond doesn’t *keep* costing the company/government money like stocks.
This can be attractive to the buyer because companies (and governments) don’t always go up in profits. You could buy a stock for $100 and then the company reports like, $2 in profit and you only get a fraction of that. It could take many years to get a return, if you ever do. Stocks might also go up way *more* and give you a much *better* return. You can’t know for sure, although if you’re savvy you will pay attention to what the company is doing and hopefully be pretty confident about what you’ll get. Even if you are *super* confident, though, there might be some global event like, oh, a pandemic or war in Ukraine…who knows? And those could really mess up what happens to that company.
On the other hand, the bond could say that after 5 years you get $500 and the entity that issued the bond owes you $500 whether their income went up or down. It’s still not perfect, because that company (or government) could collapse and just not have the money to give you. Or it could collapse and disappear entirely. So there’s still a bit of a gamble. However, governments, at least, tend to be pretty stable long-term. If the US government isn’t able to pay off its debt then there are probably much bigger problems in the world to worry about anyway.
So *in general* bonds are a more reliable, more stable investment, with the downside that the return is fixed. There’s no way to make *more* money than the given value of the mature bond.
Bonds are basically loans. The issuer of a bond — government or company typically — need money and can collect the necessary funds through issuing and selling bonds. They then pay interest on the bonds for their duration, and return the principal at the end.
So a company wants to build a factory and needs $10m. They issue $10m in bonds that pay 5% for 10 years.
They use the money to build the factory and pay $500k in interest each year to all the bond holders. At the end of 10 years. They pay back the original $10m. Presumably the factory has generated enough additional profits that they can do so.
For the investor, the benefit of buying the bond is the guaranteed interest payment as a low/no risk investment.
It’s an IOU with added interest, you get compensated for not being able to utilise this money in the time it takes the bond to mature and for a given risk associated with it.
If you need money, you go to a bank and ask for a loan. But when a government needs money (also companies, but they’re used mostly by governments), sometimes they need so much money that the bank cannot provide. So, what about asking a lot of banks for the money? Actually, why not asking anyone that wants to lend us money?
The government prints papers called “bonds” and sells them to whoever wants to buy them, with the promise of buying them back later at a higher price. That higher price is generally set as an interest rate. Sometimes the government pays them in full after the period ended, sometimes they pay year after year (or month after month) in small installments.
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