Learning about Bond Basics

A bond is basically an IOU. When you purchase a bond, you are lending money to a government, municipality, corporation, federal agency, or other entity. In return for the loan, the entity promises to pay you a specified rate of interest during the life of the bond and to repay the face value of the bond (the principal you invested) when it matures or comes due. The entity to whom you’re lending money when you buy a bond is called the issuer.

Bonds aren’t like stocks. You are not buying part ownership in a company or government when you purchase a bond. Instead, what you’re actually buying —or betting on —is the issuer’s ability to pay you back with interest.