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Bonds and Interest rates 101 by Jim Schultz

25 Sep

What is a bond?
A bond is a term used to describe a type of debt. A company might sell bonds to raise money from investors at a certain interest rate (the bond’s coupon rate) over a period of time (until the bond’s maturity).

To make bonds easier to understand, we can think of them like borrowing money from a bank or a credit card. If a bank loans us $10,000 at a 5% interest rate, they have in essence bought a bond from us. To get money from the bank now, we agree to pay them back the initial loan amount plus interest over a set period of time. Similarly, companies selling bonds get money from bond investors now and pay it back plus the coupon rate over the bond’s maturity.