Bond

Definition

A bond is a fixed-income security that pays interest. The issuer agrees to pay the bondholder a regular set sum based on the amount borrowed and the bond’s coupon, and to repay the prin­cipal amount of the loan at a future date. Many variations exist on this basic format, including bonds with no coupon and with variable coupons; bonds may also contain call or put provisions. The price of a bond is quoted assuming a par value of 100; thus, if a bond price is quoted as $90 and the principal value of the actual holding is $1,000, that holding is valued at $900. A bond selling above 100 is said to be trad­ing at a premium; at 100, at par; and below 100, at a discount. The price varies over the life of the bond as interest rates, perceived credit quality and other factors fluctuate, and as the bond approaches its maturity date. A bond’s price is inversely related to its yield: It rises when the bond’s yield falls and declines when the yield rises. Bonds belong to the fixed-income asset class.