What is a Bond in Finance : Meaning, Types, Features & Benefits

A bond in finance is a fixed-income investment where people lend money to a company or government for a set time at an agreed interest rate. The borrower returns the money with interest after the period ends.

For example, Meena bought a ₹10,000 bond from the Indian government for 5 years at 6% yearly interest. Each year, Meena gets ₹600 as interest, and after 5 years, she gets back her ₹10,000. This way, Meena earns money safely.

Here is how Meena's bond works:
 

Bonds help people grow money steadily and help governments or companies raise funds.

The Mechanism of Bonds

Bonds are like formal loans. When you buy a bond, you lend your money to a company or the government, and in return, they promise to pay you interest regularly and return your money after a fixed time. This setup is common for raising money for schools, roads, or expanding businesses.

Let’s understand this with an example:

Ravi, a school teacher, buys a ₹5,000 bond from a company for 3 years at a 7% interest rate. Each year, the company pays Ravi ₹350 as interest (7% of ₹5,000). After 3 years, the company returns its ₹5,000. So, Ravi earns money without taking much risk.
 

Top 10 books to understand Bond in Finance

1. The Bond King 

Mary Childs, a well-known financial journalist, tells the story of Bill Gross, who changed the bond market in America. She explains how he made bond investing more exciting and risky, from starting Pimco to dealing with the 2008 crisis. The book shows how his actions and the market worked together to shape bond investing today.

2. When Genius Failed

Phil Pearlman from Osprey Funds still says this book is a great read, even after many years, because it explains the bond market clearly. Tim Seymour, a finance expert on CNBC, also says it’s one of the best books to understand how markets work. 

Max Levchin, who helped start PayPal and now leads Affirm, also supports the book. Their views show that this book is very helpful for anyone who wants to learn about bonds and risk in a simple way.

3. The Strategic Bond Investor

Anthony Crescenzi, a senior leader at PIMCO, shares his many years of experience in bonds in this updated book. He helps readers understand how the bond market works, especially after the 2008 crisis and the COVID-19 pandemic. 

He explains how to read market signals, deal with big changes in the economy, and use different bond strategies for different goals. The book gives clear and useful advice, making it easier for readers to make smart investment choices in changing times.

A Closer Look at the Core Bond Categories

There are four main types of bonds you will find in the market. Each has a different purpose and comes from a different type of issuer. Here's a simple table to help you understand them with examples:
 

How Interest Rates Affected Bond Prices?

In 2022, many central banks like the US Federal Reserve raised interest rates sharply, moving from around 1.5% to over 4% (e.g. US Aggregate bond yields rose from 1.7% to 4.65%).

As those rates climbed, older bonds with lower coupons dropped in value. For instance, PIMCO  held long-term bonds bought when yields were just 1–2%. When yields rose, the market value of those bonds fell sharply, creating paper losses for PIMCO.

Similarly, an investor in a 7% government bond in India found that in 2023, new bonds were offering 8%- 8.5%, so selling the older bond early meant accepting a lower price.

This scenario shows that:

• When interest rates rise, bond prices fall, even though the owner still receives the coupon payments.
   
• This happened to institutions like PIMCO and everyday investors during the 2022 surge in interest rates.

Common Bond Terms

When reading about bonds, you may come across words like "coupon," "maturity," or "yield". These may sound complex at first, but they are easy to understand when broken down. Here's a simple table to help:
 

How to Invest in Bonds?

Investing in bonds is easy once you know where and how to buy them. Here are simple ways you can start:

Steps to Invest in Bonds:
 

1. Use an Online Broker
   Most online or discount brokers let you buy bonds just like shares.
    
2. Buy Directly from the Government
   You can buy government bonds (like Treasury Bonds or TIPS) directly from the official website
    
3. Invest Through Bond Funds
   You can buy mutual funds or ETFs that hold many bonds. These give you a mix of bonds in one go.
    
4. Check Bond Brokers
   Some special brokers focus only on bonds. You can use them if you want more help or options.
    
5. Look at Trusted Platforms
   Websites like Investopedia give lists of top online brokers to help you choose.
    

Conclusion

In finance, a bond is a reliable investment tool that lets you act as a lender. When you buy a bond, you lend money to a government, company, or public body for a fixed period. In return, they pay you interest, known as the coupon at regular intervals, and give back your original amount, called the principal, when the bond matures.

Bonds help organisations raise money for important work, like building roads, schools, factories, or funding research. For you as an investor, bonds offer a steady income and lower risk compared to shares. They play a key role in creating a balanced investment portfolio.

FAQ’s

1. What is a bond in finance?
A bond is a loan you give to a company or government. They pay you interest and return your money after a set time.

2. How do bonds work?
You buy a bond, earn regular interest, and get your full amount back at maturity.

3. Are bonds safe to invest in?
Yes, bonds are safer than shares, especially government bonds, but they still carry some risk.

4. Who can issue bonds?
Governments, cities, and companies can issue bonds to raise money for projects.

5. Why should I invest in bonds?
Bonds give steady income, help reduce risk, and are good for long-term savings.

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LoansJagat Team

We are a team of writers, editors, and proofreaders with 15+ years of experience in the finance field. We are your personal finance gurus! But, we will explain everything in simplified language. Our aim is to make personal and business finance easier for you. While we help you upgrade your financial knowledge, why don't you read some of our blogs?