Bonds

Introduction and Significance of Bonds 

Bonds provide investors with regular payments and the return of the principal at maturity. 

These investments are loans to corporations, municipalities, or governments, making them essential tools in financial markets for funding projects and operations. 

Unlike stocks, which represent ownership and can fluctuate significantly, bonds offer stability and predictable returns. 

This reliability appeals to those seeking consistent income, like Maya, our lesson's hero approaching retirement.

Key Features & Role of Bonds  

Bonds are fixed income securities with three key features: principal, the initial loan amount repaid at maturity

Interest rate (coupon), which determines fixed periodic payments to investors; and maturity date, when the issuer repays the principal. 

They enable governments, corporations, and municipalities to raise funds for infrastructure, business expansion, and public services. 

Bonds also enhance market liquidity, economic stability, and efficient capital allocation.

Benefits for Issuers 

Issuing bonds allows governments and corporations to raise substantial capital without surrendering ownership or control. 

Governments finance essential services and infrastructure projects through bonds. 

Corporations may prefer debt over equity to avoid diluting shareholders' stakes and maintain decision-making authority. 

Additionally, interest payments on corporate bonds are often tax-deductible, reducing the overall cost of borrowing and providing financial advantages compared to equity issuance.

Benefits for Investors 

For investors, bonds offer predictable interest payments, aiding in budgeting and financial planning. 

The return of principal at maturity helps preserve capital, reducing the risk of significant losses. 

These investments also diversify portfolios, as they often react differently to market conditions than equities. 

This diversification can mitigate overall portfolio risk, especially during stock market volatility, making bonds a valuable component for those seeking stability, like Maya.