Short definition: A bond is a debt security in which an investor loans money to an entity (typically corporate or governmental) that borrows the funds for a defined period of time at a fixed interest rate.
Explanation: Bonds are essentially IOUs. The issuer promises to pay the investor periodic interest payments (coupons) and to repay the principal amount (face value) at maturity. Bonds are considered less risky than stocks, but their returns are typically lower.
Example: A government might issue bonds to finance infrastructure projects, while a company might issue bonds to raise capital for expansion or acquisitions.
Additional information (optional): The interest rate on a bond is called the coupon rate. The price of a bond can fluctuate in the secondary market depending on various factors, such as interest rate changes, credit risk, and market demand.