My finances

What is a Bond?

A bond is a loan to a company or government. It is often for a set term. At the end of this term you will get back your loan provided that the company or government is still in business.

In return for your loan, you are paid interest, sometimes called “coupons”. The coupon will depend on several factors:

  • How long you make the loan for (ie the period to when you get your money back)
  • How risky the company or government is thought to be (ie how much risk is there that you the company or government might not be in business by the time your money is due to be repaid

Typically, the longer the period of the loan, and the riskier the company/government is, the higher the interest or coupon. In other words, to reward you for the greater risk you are taking with your money, you receive a higher interest payment.

As a bondholder, you will not get a share in the profits of the company, but you are not as exposed to losses as a shareholder, provided the company/government does not completely fail.

You can still lose money on bonds as the price of your bond does go up and down depending on the factors mentioned already.

The price of your bond reflects the price at which you could sell your loan to another investor if you need your money back before the end of the loan period. The price depends on a number of factors and how they compare to the situation you first made your loan:

The general market view as the strength/viability of the company.
The general market view of the sector in which your company/government operates.
The general market view of the geographical area in which your company/government operates.
The general market view of the global economy.
The general market view on inflation and interest rates.