Definition
A bond is a debt security in which an investor lends money to an issuer, such as a government or company, in return for scheduled interest payments and repayment of the principal at maturity.
How it works
The issuer sets the terms at issue: the face value to be repaid, the coupon paid along the way and the maturity date. Bonds can be traded before maturity, so the market price may sit above or below face value.
Prices usually move opposite to market interest rates: when rates rise, older bonds with lower coupons become less attractive and their prices fall. Bondholders generally rank ahead of shareholders if an issuer fails, yet repayment is never certain. Key risks include interest-rate, credit, inflation and liquidity risk.
Formula / convention
Total scheduled cash flows (undiscounted) = Coupon payment × Number of payments + Face value
Illustrative example
A fictional company issues a 5-year bond with a face value of HK$1,000 and a 4% annual coupon. A holder who keeps it to maturity would receive HK$40 a year for five years plus HK$1,000 at the end, a total of HK$1,200 of scheduled payments if the issuer pays in full.
What to watch for
Scheduled payments are promises, not guarantees: the issuer can default, and selling before maturity can lock in a loss if market yields have risen.