Bonds are financial instruments, just like stocks (or equities). Specifically, they are debt instruments commonly issued by a government or company in order to raise funds from investors in the market.
In other words, when someone sells a bond to the market they are borrowing money from the market.
Bonds normally have ‘coupons’ and a ‘principal’. The principal is the amount borrowed and is normally repaid in full at the end of the life of the bond (at ‘maturity’) while coupons are effectively the interest paid on the loan, and are often expressed as a percentage of the principal.
As an example, a company may borrow £100 for 10 years by selling a bond to the market. The company would then pay, say, a coupon of 2% (or £2) every year and at the end of those 10 years it would repay the £100 plus the final year coupon of £2. Therefore a bond investor would receive a total of £120.
There are two large sub-groups within the financial markets – fixed income and equities (i.e. stocks). Bonds are part of fixed income as their income is pre-determined, or ‘fixed’. Currencies and commodities are also sometimes considered to be part of fixed income securities but bonds are normally the only products with truly fixed income.
