What are bonds?

Bonds are defined as debt securities that are issued by various entities, including governments and corporations, to raise funds. When an entity issues a bond, it is essentially borrowing money from investors with the promise to pay back the principal amount on a specified maturity date along with periodic interest payments, called coupon payments. This makes bonds a crucial component of the debt market, as they facilitate capital generation for issuers while providing investors with a regular income stream and the potential for return of their principal.

Bonds typically carry different levels of risk compared to other financial instruments such as stocks, which represent ownership in companies. The return on bonds is usually fixed, as opposed to stocks, which can fluctuate based on the company's performance and market conditions. This characteristic attracts a diverse pool of investors, especially those who may prioritize capital preservation and income stability in their investment portfolios.