Bonds are issued to finance various activities, such as infrastructure projects or corporate expansion, and they are generally considered a safer investment compared to stocks. When an investor purchases a bond, they are effectively agreeing to lend money to the issuer for a set period, known as the maturity period. In return, the issuer pays the investor interest at regular intervals, which is typically fixed, leading to predictable cash flows. The bond’s face value is repaid to the investor when the bond matures. Bonds can be traded on secondary markets, and their prices fluctuate based on interest rates, credit ratings, and overall market conditions.
Bonds Example
For example, if an investor buys a $5,000 bond from a city government with a 4% interest rate that matures in 10 years, they will receive $200 in interest annually for ten years and will get back the initial $5,000 when the bond matures.