Economics Bonds Questions Medium
A bond is a financial instrument or a debt security issued by a borrower, typically a government or a corporation, to raise capital. It represents a loan made by an investor to the issuer, who promises to repay the principal amount along with periodic interest payments over a specified period of time.
When an investor purchases a bond, they are essentially lending money to the issuer. The bond will have a face value, also known as the principal or par value, which is the amount that will be repaid to the investor at maturity. The issuer also specifies the interest rate, known as the coupon rate, which determines the periodic interest payments the investor will receive.
Bonds have a fixed maturity date, which is the date when the issuer is obligated to repay the principal amount to the investor. Until maturity, the investor will receive periodic interest payments, usually semi-annually or annually, based on the coupon rate and the face value of the bond.
Bonds can be bought and sold in the secondary market before their maturity date, allowing investors to potentially earn capital gains or losses. The price of a bond in the secondary market is influenced by various factors such as changes in interest rates, credit ratings of the issuer, and market demand.
The issuer's creditworthiness is an important consideration for bond investors. Credit rating agencies assess the issuer's ability to repay the debt and assign a credit rating accordingly. Higher-rated bonds are considered less risky and typically offer lower interest rates, while lower-rated bonds carry higher interest rates to compensate for the increased risk.
Overall, bonds provide a means for investors to earn fixed income over a specified period of time while providing issuers with a way to raise capital for various purposes such as funding infrastructure projects, expanding operations, or financing government expenditures.