How do bonds work?

A bond is essentially an IOU issued by a borrower, such as a company or a government, to an investor. When you buy a bond, you are essentially lending money to the issuer in exchange for interest payments and the return of your principal when the bond matures.

Bonds typically have a set maturity date, at which point the issuer must repay the principal amount of the bond to the investor. Until that time, the issuer makes regular interest payments to the investor at a predetermined rate, known as the coupon rate.

Bonds can be bought and sold on the open market, and their prices can fluctuate based on a variety of factors, including changes in interest rates and credit ratings. Investors can also buy bonds through mutual funds or exchangetraded funds (ETFs), which provide exposure to a diversified portfolio of bonds.