Understanding Bonds: A Beginner’s Guide

What Are Bonds?

A bond is essentially an “IOU” issued by governments, corporations, or financial institutions when they need to borrow money. When you buy a bond, you're lending money to the issuer in exchange for periodic interest payments and the return of your principal at maturity.

How Do Bonds Work?

1. The issuer (government or company) sells bonds to raise funds.
2. Investors buy bonds, effectively lending money to the issuer.
3. The issuer pays interest (also called a coupon) at regular intervals.
4. At the end of the term (maturity), the issuer repays the principal amount.

📌 Example:

• The government issues a 3-year bond with a 3% annual interest rate.
• You invest $1,000 in this bond.
• Each year, you receive $30 in interest (3% of $1,000).
• After 3 years, you get back your original $1,000 investment.

Types of Bonds

✅ Based on Issuer:

• Government Bonds: Issued by national governments (e.g., U.S. Treasury Bonds, Korean Government Bonds).
• Corporate Bonds: Issued by companies to fund operations or expansion.
• Municipal Bonds: Issued by local governments.

✅ Based on Interest Payment Structure:

• Coupon Bonds (Fixed-Rate Bonds): Pay regular interest (e.g., every 6 months).
• Zero-Coupon Bonds (Discount Bonds): Issued at a discount and pay full face value at maturity instead of periodic interest payments.

Key Features of Bonds

1️⃣ Lower Risk than Stocks → Bonds are generally considered safer investments than stocks, as they provide a fixed return.
2️⃣ Fixed Income → Investors receive regular interest payments, making bonds attractive for income-focused investors.
3️⃣ Affected by Interest Rates → Bond prices and interest rates move in opposite directions:

• If interest rates rise, existing bond prices fall (because new bonds offer higher yields).
• If interest rates fall, existing bond prices rise (because they offer better returns than new bonds).

💡 Key Takeaway: Bonds are a stable investment option, offering predictable income, but they are sensitive to interest rate changes. Understanding these basics can help you make smarter investment choices.