2.6 : Introduction to Bonds

Bonds, the cornerstone of the financial world, are fascinating debt instruments issued by entities in need of capital. When you invest in a bond, you're essentially providing a loan to the issuer, which could be a government, municipality, or corporation. In return for this loan, the issuer promises to repay the principal on a specific maturity date. Until then, bondholders typically receive periodic interest payments, known as coupons, a fixed percentage of the principal.

This setup makes bonds attractive for regular income with relatively lower risk than stocks. Government bonds, like U.S. Treasury securities, are often considered one of the safest investments, as they are backed by the government's ability to tax its citizens.

Credit ratings are crucial to bonds. Think of them as a gauge of a bond's risk, where agencies evaluate the issuer's financial strength and the likelihood of meeting its obligations. Bonds with high credit ratings are considered investment-grade, appealing to conservative investors. On the other hand, those with lower ratings are often referred to as high-yield or junk bonds, which might attract risk-takers.