What is a bond and how does it work?

A bond is a type of debt security that represents an agreement between the borrower (usually a company or government) and the lender (investor) to borrow a sum of money for a specific period of time at a predetermined interest rate. When an investor buys a bond, they are essentially lending money to the issuer for a fixed term, and in return, they receive regular interest payments and the return of their principal investment when the bond matures.

Bonds work by the issuer borrowing money from investors and promising to pay them back at a future date with a fixed amount of interest. The interest rate on a bond is determined by several factors, including the creditworthiness of the issuer, the term of the bond, and the prevailing interest rate environment. Bonds can be traded on financial markets like stocks and are generally considered less risky than stocks because they offer a fixed income stream and a return of principal at maturity.