What Is a Bond?

A bond is a loan, not ownership

When you buy a share (covered earlier in this series), you own a slice of a company. When you buy a bond, you're doing something fundamentally different: you're lending money — to a government or a company — in exchange for a promise to be paid back, with interest, on a defined schedule.

You have no ownership stake, and you don't benefit if the borrower's business does spectacularly well. In exchange, you typically have a more senior, more predictable claim than a shareholder does — bondholders get paid before shareholders if a company runs into trouble.

The vocabulary you actually need

• Face value: the amount the bond repays at maturity — typically ₹100 or ₹1,000 per unit in India.
• Coupon: the fixed interest payment the bond pays, usually annually or semi-annually, expressed as a percentage of face value.
• Maturity date: the date the borrower repays the face value in full.
• Yield: the effective annual return you actually earn, which can differ from the coupon if you bought the bond above or below its face value (more on this in the next piece).

Government vs. corporate bonds

The single biggest factor differentiating bonds is who's borrowing:

• Government bonds (G-Secs): issued by the Government of India, considered effectively free of default risk — the government can always raise taxes or print currency to repay rupee-denominated debt.
• Corporate bonds: issued by companies, carrying genuine default risk — the company could fail to repay. Riskier corporate bonds pay a higher coupon to compensate lenders for that added risk, a gap known as the credit spread.

Why a bond's price isn't fixed, even though its coupon is

A bond's coupon payment never changes once issued. But the bond itself can be bought and sold before maturity, and its price in that secondary market moves — often quite a lot. This happens because newly-issued bonds start paying whatever the current prevailing interest rate is, which makes existing bonds with older, fixed coupons either more or less attractive by comparison.

This relationship — between prevailing interest rates and the price of already-issued bonds — is the single most important mechanic in fixed income investing, and it's exactly what the next piece in this series covers in full.